Shortages of housing in key areas will mean property prices are set to rise strongly this year and the following year.
A rise in disposable income, population growth and the Government’s help-to-buy scheme will also boost demand, says ratings agency Standard & Poor’s.
It expects prices to rise by 7pc this year, with values also set to rise due to looser lending rules introduced last month by the Central Bank.
And prices will rise by 5pc in the follow year, the international ratings agency predicts.
The strong property value gains will come despite households still being lumbered with large debts, a legacy of the property bust. The collapse of the construction sector, and its slow recovery, has also restricted supply, pushing up demand.
“The Irish housing market remains impaired by crisis legacy issues.
“House price growth, however, should remain robust, underpinned by shortages in key areas, continued improvement in the labour market, and as help-to-buy and looser mortgage lending rules for first-time buyers are starting to have an impact,” Standard & Poor’s said in a new report on Europe’s housing markets.
The help-to-buy tax rebate gives 5pc back to buyers of new homes, up to a limit of €20,000.
Analysts at the ratings agency estimate that household consumption has now come close to, or even surpassed, pre-crisis level.
The strong household spending comes on the back of recovery in the jobs market. Real wages have also gone up, due to low levels of inflation.
“The boost to households’ spending power, in particular in 2015 when economy-wide real disposable income rose by 4.6pc, helped underpin the robust upward trend in house prices,” the report states.
Property price growth is strongest outside Dublin, as these areas display catch-up price rises.
However, high household debt levels are to continue to be a drag on the housing market.
And the large number of homeowners who have low-priced tracker mortgages operates as a restriction on supply, as these people are reluctant to move house as they will lose the tracker.
Construction companies have been hit so hard by the crisis that it will take a decade for building levels to reach the point of being able to meet housing demand.
Household formation and net migration will put additional pressure on the demand for housing, the ratings agency said.
From last month, first-time buyers only need a 10pc deposit to get mortgage approval. Up to then they needed a 10pc down payment for amounts up to €220,000, and a 20pc deposit for amount borrowed over that figure.
But the key issue is need for much more house building.
Standard & Poor’s said plans by the Government to commission the building of up to 37,000 social housing units by 2021 look ambitious.
“Shortages should persist over the medium term, despite a gradual recovery in household finances, and continue to underpin robust house price growth,” the ratings agency said.