Economics:As the outbreak of war approached in 1939, and Stalin remained inscrutable, Winston Churchill described Soviet strategy thus: "It is a riddle, wrapped in a mystery, inside an enigma." Much the same can be said of the performance of the Irish housing market over the past 10 years.

The Irish housing boom of the past decade defies a credible economic explanation. In broad terms, the number of new houses added to the national dwelling stock between 1996 and 2006 was almost twice the number of new households formed over the same period.

Yet, despite this imbalance between basic additions to demand and supply, the price of new homes increased 3½ times over this 10-year stretch.

This either suggests a near insatiable appetite for domestic property among existing home owners or sustained speculation in the Irish housing market, for a house is no longer only a home, it's also an investment property.

Key housing trends over the past decade are outlined in the table. Housing completions numbered 33,725 in 1996. Thereafter, they climbed at an accelerating pace, reaching a peak at 93,419 completions last year.

Overall, 608,000 new homes were added to the Irish housing stock between 1997 and 2006, with more than one quarter of a million units constructed in the last three years alone. By 2006, the number of dwellings in the country had risen to 1.77 million, an increase of more than one half on the housing stock a decade earlier. This represents a substantial addition to the supply side of the housing market in anybody's language.

On the demand side, two demographic trends have favoured house building over the past decade. First, the population of potential first-time home buyers rose rapidly.

Enhanced by strong net immigration inflows, the population aged between 20 and 34 years expanded from 813,000 in 1996 to 1.065 million in 2006, an increase of 252,000 or 31 per cent. Almost half of all new homes are bought by first-time buyers and four out of five of these are under the age of 35.

The second important demographic trend that shapes new housing demand is the rate of household formation.

According to census data, the number of households in the country increased from 1.12 million in 1996 to 1.47 million in 2006, an increase of 350,000 households, or 31 per cent over the decade. Again, while this represents rapid growth in the derived demand for housing, it falls far short of the 600,000 housing units added to supply over the decade.

Thus, demographic factors alone simply do not adequately explain the scale of housing demand and spiralling house prices over the past decade.

The table quantifies the upward trajectory in house prices. The average price of a new house or apartment in 1996 was €87,202. Ten years later, the average new home cost 3½ times more, at €305,637. Inflation in second-hand house prices was even more pronounced, with average prices rising four and one-third times in the 10 years to 2006.

It might be expected that housing inflation on this scale would have choked off demand on affordability grounds alone, particularly among first-time buyers. Not so.

While affordability has decreased over the past decade, the decline is not as great as might be inferred from the rise in house prices. The affordability ratio measures mortgage repayments as a proportion of the disposable income of a two-earner married couple, based on a 20-year mortgage, and the prevailing new house prices and mortgage interest rates current each year.

Affordability has decreased, with the ratio of repayments to net income rising from 23 per cent in 1996 to 31 per cent last year. However, longer mortgage terms, the advent of 100 per cent mortgages and inter- generational wealth transfers that provided the cash for deposits on new homes have eased affordability strains.

All of these factors, however, only explain why young first-time buyers can continue to purchase new homes in the face of rocketing house prices.

We are still left with the problem of explaining the gap of 250,000 housing units separating an addition of 600,000 new units to supply from additional core housing demand of 350,000 arising from new household formation over the past decade.

The answer is investment demand, powered primarily by expectations of substantial future capital gains. For this reason, it appears that over the past decade, investors were not only buying to let, but buying to hold. As a result, there are a lot of empty houses and apartments.

The 2006 census discovered that 266,000 houses and apartments across the country were vacant. With the dwelling stock at 1.77 million units, this represents a national vacancy rate of 15 per cent. Holiday homes accounted for 50,000 of the total. When these are excluded, that still left 216,000 other housing units empty.

Of these, 46,000 houses and apartments in Dublin were vacant on the census date, almost 10 per cent of the county's total housing stock.

Thus, in the period ahead, both the performance of house building and the trend in house prices will be determined not only by new pressures on affordability - primarily a function of interest rate changes - but by investors' decisions on retaining or disposing of their existing housing portfolios.