Overdependence on the housing market poses a serious threat to the economy's future, according to new research from financial services group Friends First.

Consumer spending in Ireland is now back to Celtic Tiger levels but is dependant on confidence in the housing market holding up, according to Friends First's latest quarterly economic outlook.

"Despite huge levels of personal indebtedness, this consumer behaviour is being driven by rising salaries, the prospect of maturing SSIA funds, the expansionary fiscal policy of the current Government and an incredible willingness to borrow," said Friends First economist Jim Power, the author of the report.

The outlook predicts the economy will grow this year by 5 per cent and that house prices will rise nationally by 7 per cent.

Friends First estimates the total value of housing stock in the economy at €530 billion, and says that construction activity added €30 billion to the economy in 2005, some 19 per cent of last year's total economic output.

According to Mr Power, financial markets expect the European Central Bank to increase interest rates by 1 per cent by the end of 2007.

Combined with rising debt levels, this would put borrowers under pressure in the event of a fall in house prices

"A significant correction to house prices would have a substantial negative wealth effect on consumer confidence and would undermine the overall economy."

Friends First predicts Irish equities will continue to outperform most other stock markets in the coming year, but that the share price of some companies would also be hit in the event of a downturn.

Mr Power called on the Government to reduce the economy's dependence on the housing market.

"Clearly the Irish economy risks becoming akin to a bird flying on one wing, so it is incumbent on our policy makers to ensure that greater balance is restored. In this context there has to be a renewed focus on nurturing an indigenous and sustainable economic base."

Friends First forecasts the value of the euro to strengthen to $1.25 and £0.70 by the end of this year.

The Money Advice and Budgeting Service warned on Tuesday that further rate rises would leave thousands of borrowers unable to meet day-to-day living expenses.