House price growth is picking up again, according to a report published yesterday.

AIB Global Treasury Economic Research have revised upwards their forecasts for average house prices growth in 2005 and 2006 from 5 per cent and 2 per cent, to 7 per cent in both years.

The report on the housing market predicts interest rates to rise by 0.5 percentage point next year, but makes no predictions for rate increases beyond then. Affordability will remain "comfortable" according to the report as a strong economy and low taxation underpin mortgage repayment capacity.

The report predicts that 77,000 new houses will be constructed each year until 2007, with demand growing by 60,000 annually thereafter.

Strong indigenous population growth backed by net immigration and a falling number of persons per household were all contributing to rising housing demand. AIB chief economist John Beggs said that the economy was going through a transition phase.

"We should be aware that the economic cycle isn't the only thing influencing growth. We do not see any prospect of a housing market crash nor a slowdown. We expect the soft landing to be extended to 2008," he said.

But Mr Begg warned that the prospect of increased taxation or alternations to property taxation in the next budget could undermine the housing market. "A major risk is government and taxation.

Any proposal for increased taxation affecting the market as a whole or on particular segments of the market, such as second homes, would have a significant impact on the sentiment, activity and prices," he said.

Mr Begg also warned of excessive industry optimism. "In times of stability, there is a considerable risk that complacency could be established".

The level of personal indebtedness will rise to 150 per cent of personal disposable income by 2006. Yesterday Goodbody stockbrokers - owned by AIB - predicted that personal lending would reach 160 per cent of personal disposable income. But Mr Begg said that higher levels of personal indebtedness were justified by strong growth in house values.

In its latest forecast for the whole economy, the AIB predicts growth to accelerate from 4.5 per cent this year, to 5 per cent next year and 5.5 per cent in 2007.