AIB has predicted that house prices will fall by 2 per cent this year. The warning came on the day the European Central Bank (ECB) raised interest rates for the eighth time since December 2005 and indicated further rises may be on the way.
The increase in European interest rates combined with fears that US rates will remain high hit share prices globally. European markets were down 1.5 per cent and on Wall Street the Dow Jones fell almost 1 per cent.
As much as €3 billion was wiped off the value of the Irish market yesterday. The fall, which came on the back of a €2.6 billion loss on Tuesday, was attributed to the ECB rate rise and also news that Irish mortgage lending fell in the first quarter. The financial institutions most closely tied to the property market were the worst hit.
The data on mortgage lending came from the Irish Bankers' Federation, whose survey of the mortgage market suggests that lending fell by 7.5 per cent in the first quarter, the first annual fall recorded in the history of the survey. The quarter-point rise, announced yesterday by Mr Trichet, brings the bank's main refinancing rate to 4 per cent, and raises the cost of a typical €300,000 mortgage by €40 a month.
Eight such increases have occurred since December 2005, implying a rise of about €320 for a €300,000 mortgage.
Mr Trichet said the ECB remained concerned about the threat of inflation in the euro zone.
AIB chief economist John Beggs predicted yesterday that interest rates would rise further, a development which he said would have a "crucial impact" on house price trends.
"We see rates being increased to 4.25 per cent in September and by a further 0.25 per cent to 4.5 per cent in early 2008," he said.
"This would still be below the peak for interest rates in the last cycle of 4.75 per cent."
AIB also warned that the Irish housing market was entering a crucial period and that deteriorating affordability conditions were taking their toll on activity levels.
It said prices will fall by 2 per cent this year, but that this still constituted a soft landing for the market. "The annual rate of house price inflation could well turn negative over the summer months and, even with some modest increases in prices in the latter part of the year, the inflation rate could still be in negative territory in December," the bank said.