Higher rates to cool house prices in 2007 - BoI

Bank of Ireland expects house prices to rise by 9 per cent this year before slowing to 3 per cent in 2007 as higher interest …

Bank of Ireland expects house prices to rise by 9 per cent this year before slowing to 3 per cent in 2007 as higher interest rates cool the market.

The bank's latest analysis of the property market is consistent with recent reports that the property market has gotten off to a flying start in 2006.

The bank's chief economist Dan McLaughlin cited the strength of the economy that created 80,000 jobs last year and the giveaway Budget as factors driving the property boom.

However the spectre of higher mortgage rates - which the bank forecasts could reach 4.75 per cent next year - will eventually mean that  household budgets will be stretched to cover monthly payments.

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In terms of affordability, the annual cost of servicing a new 25-year mortgage relative to average income will rise to 38 per cent, well above the average of 28 per cent seen over the past 30 years.

Dr McLaughlin said the higher rates will result in a "substantial deceleration" in house price inflation in 2007.

The ECB has warned that higher interest rates are on the way as it seeks to ensure inflation will not choke the euro zone recent recovery.

Dr McLaughlin described the level of activity in construction as remarkable with supply reaching record levels. House completions rose to 81,000 in 2005 and should reach 85,000 in 2006.

Joe Larkin, director of personal lending at Bank of Ireland said: "The housing market in 2006 is likely to remain strong resulting in new mortgage lending growth of circa 11-12 per cent equating to another year of 110,000 new mortgages."