The growth in mortgage debt must slow or the economy will be vulnerable when interest rates rise, the Central Bank has warned. House prices in the Republic are now the most expensive in the EU, it says, and borrowing across the economy has been rising at three times the EU average.
The latest warning on the property market is the strongest to date from the Central Bank.
It coincides with an analysis from the International Monetary Fund (IMF), which identifies the Irish property market as one of a number where sharp price rises are a cause for concern.
While not predicting an imminent collapse in Irish house prices, the IMF warned that a bursting of the property "bubble" in an economy can cause serious difficulties as it filters through and hits investment and consumer spending.
In a special study of the Irish market, the Central Bank finds that the ratio of household debt to disposable income has more than doubled over the past decade. This means that personal debt now represents almost 100 per cent of the average Irish worker's after-tax income.
Meanwhile, wider private sector credit, which includes business loans, has been growing three times faster than in other euro zone countries.
In February, private sector credit was almost 20 per cent higher than in the same month of 2003. This compared to growth of 6 per cent across the euro zone.
The bank says the measure is not yet at danger levels, but warns that Irish borrowing growth must now slow sharply.
"There is a limit to the extent that Ireland can sustain rates of credit growth which are a multiple of the euro area average," the bank warns.
It calls for a "significant slowdown" in the rate of mortgage credit growth in particular, saying that lenders and borrowers needed to "limit excesses".
Recent figures have shown mortgage credit growth increasing at an annual rate of more than 25 per cent.
Both the bank and the IMF point out that - unlike in many other EU countries - the vast majority of mortgage debt in Ireland is affected by variable mortgage interest rates.
This leaves Irish borrowers particularly vulnerable when borrowing costs start to rise.
Euro zone interest rates are not expected to increase in the short term. Indeed the IMF yesterday made the case for a further reduction. However, in a significant comment the head of the US Federal Reserve Board, Mr Alan Greenspan, said yesterday that US rates would have to increase at some stage and euro zone rates are likely to follow some time next year.
