A leading stockbroker forecast today that the property market will slow down over the next 18 months as higher interest rates will force consumers to curb their debt levels.
Dermot O'Leary, Goodbody
In a report on the Irish economy titled Tracking the Tiger,Goodbody Stockbrokers gives an upbeat assessment of the economy's prospects but warns that the free ride the economy has enjoyed from artificially low interest rates is coming to an end.
According to the analysis carried out by Goodbody's chief economist Dermot O'Leary, interest rates would be at 5.7 per cent rather than the current 2.5 per cent if Ireland still had control of its own monetary policy.
"Nevertheless, affordability levels will continue to become stretched as interest rates rise over the next 12 months. While longer mortgage terms can help to sustain affordability, this tactic cannot be used indefinitely," Mr O'Leary writes in his commentary.
Low interest rates and strong demand from a young population has fuelled the property boom and credit growth since the mid 1990s leading to a tripling of prices since 1996.
"If the current rate of (house) price inflation continues, affordability will begin to deteriorate sharply by the end of the year, given the expected profile of interest rates.
The report warns that the impetus from cheap credit may dissipate over the coming months as the ECB hikes rates possibly by as much as 75 percentage points.
While this monetary tightening is unlikely to defuse the explosion in consumer debt given the strength of the economy, Mr O'Leary expects it to have at least a moderating effect.
"Therefore, we expect to see affordability constraints to have a dampening impact on mortgage credit and house price growth over the next 12-18 months," the report states.