THE Central Bank yesterday issued a warning that house prices could fall "quite dramatically." It cited the example of other countries which had experienced house price inflation on the same scale as Ireland.
There has not been a single episode of such inflation which did not end in prices "falling, in some cases quite dramatically," said the bank in its winter quarterly bulletin.
It takes issue with Finance Minister Charlie McCreevy, saying his Budget will add to inflation, not reduce it, as he predicted.
It estimates that his £4bn package of extra spending and tax cuts will add 1pc to consumer prices, while the cuts in VAT and fuel duties will knock off only half a per cent.
As a result, it expects inflation next year to average 5pc little changed from this year's expected average of 5.5pc.
But it says the sharp and sustained price rises in the property market, the increase in the ratio of average house prices to household disposable income and the increasing mortgage repayment burden "point in the direction of growing risks and the possibility of speculative activities in the housing market."
The average annual rate of increase in new house prices has been 15pc between 1995 and 2000, according to data from the Department of the Environment and Local Government.
In the same period household disposable income has grown on average 8pc which means the ratio of average new house prices to average household disposable income has seen a marked increase during that same period from 2.8 to a peak of almost 4.0.
The decline in mortgage interest rates from 1993 until recently has played a significant role in contributing to upward pressure on house prices, the Central Bank argues.
The average mortgage repayment burden across all households in Ireland is well below that in Britain during the 1980s boom.
However, there is no "concrete evidence" that house prices have overshot their long-run value, and while the prices are growing faster than income, it has to be assumed that individuals and lenders take account of expected future income when purchasing, says the bank.
But the Central Bank adds a note of caution that the comparatively low level of indebtedness in Ireland does imply some scope for mortgage credit to expand further "applying more pressure to property prices."