Recent falls in house prices are "more consistent with stability" than the accelerating prices of 12 months ago, and do not point to a crash in the property market, the Central Bank said yesterday.

Painting a mostly upbeat picture of the economy, Central Bank governor John Hurley said levels of output in the housing market were returning to a more sustainable level, while the growth rate of mortgage credit advanced to borrowers should be "substantially lower" by the end of the year if current trends continued.

Although a "sharper than expected" contraction in the housing market could not be completely ruled out, a soft landing was the most likely scenario.

"It is important to recall that the major underlying factors supporting the demand for housing are employment growth, increases in incomes, demographics and social changes. The prospects for these key factors remain favourable, even allowing for some moderation in the growth rate in the economy," Mr Hurley said at the launch of the Central Bank's annual report.

House prices have fallen 2.1 per cent so far this year, according to the Permanent TSB/Economic and Social Research Institute (ESRI) house price index.

Falls in the average price paid nationally for houses in each of the last three months have forced economists to revise their forecasts for the market down, with the ESRI predicting last week that prices could drop by 3 per cent this year.

Such a price decline would leave recent buyers who took out 100 per cent mortgages with negative equity - owing more than the market value of their homes.

The Central Bank said yesterday that mortgage lenders were adequately stress-testing borrowers, including those who take out 100 per cent loans, to see if they can cope with future rises in interest rates.

Actions taken by the financial regulator to prevent irresponsible lending have been quite strong compared to regulators in other countries, Mr Hurley added.

The Central Bank welcomed the deceleration of the rate of credit growth in the economy, although it noted that it was still at high levels.

It said the economy was on track to grow by 5 per cent this year and 4 per cent in 2008, despite a loss of competitiveness and the decline in the housing sector.

However it warned that the Irish economy was exposed to global factors such as a weak dollar and volatility in oil prices. It is "impossible to quantify" the risk of a sharp depreciation of the dollar, Mr Hurley said yesterday, as the dollar fell to a record low against the euro.