Houses are overvalued by about 15 per cent, the ESRI said this morning as it warned that falling prices may lead to investors pulling out of the market.
In its latest economic commentary, the Economic and Social Research Institute (ESRI) says this will lead to a reduction in the tax take on property by the Government. It also estimates 25 per cent of new houses built over the past five years were second dwellings or holiday homes.
In the light of the recent slow-down in the market, the ESRI Spring Bulletin adds, such activity will reduce significantly as investors pull out. It warns that the housebuilding industry is set to see a large reduction in activity. That industry employs one in four men in Ireland.
"A decline in real house prices could lead to a much larger reduction in the scale of house building," the commentary said.
The bulletin added that economic growth next year will fall to its lowest rate since 1993 and that growth would remain above 5 per cent this year before falling below 4 per cent in 2008 as housing investment levels off.
In 1993, the year that the Celtic Tiger emerged, growth was 2.3 per cent.
"This slowdown in growth is driven by a slowdown in housing investment, while investment in other building and construction should continue to grow strongly, driven in part by investment under the latest National Development Plan," ESRI economist Dr Ide Kearney said yesterday.
The ESRI also warns the Government to tackle the economy's falling competitiveness by taking action to cool rising inflation and borrowing.