Property prices in Ireland could fall as much as 45 per cent from levels seen in late 2006, as the economic downturn and increased costs of funding the banks weigh on the market.
According to Fitch Ratings, the average house is curently worth 7.5 times the average income, a ratio that is expected to fall to nearer 5.5 times the average individual income.
"Tax rises, high unemployment, wage deflation and property supply overhang continue to undermine the country's property market," says Alastair Bigley, Head of Irish RMBS at Fitch.
Property prices have fallen 24 per cent to date from a peak in December 2006, Fitch said.
"Despite almost three years of house price declines, prices have yet to reach a sustainable level of affordability," says Douglas Renwick, Associate Director in Fitch's Sovereigns team.
The difficult market will be further pressured by a rise in the cost of funding to financial institutions, driven by a higher than expected cost of the European Union's guarantee of banks' debt issuance compared to the current Irish state guarantee and a rise in inter bank lending rates.
Unemployment rates are also forecast to rise, reaching 12.5 per cent by the end of 2009, and 15 per cent in 2011.
"Fitch expects all lenders to increase their mortgage rates and it seems certain that mortgage affordability will suffer against a backdrop of a generally higher tax burden, increasing unemployment and negative to zero wage inflation," said Michael Greaney, associate director in Fitch's RMBS group. "Fitch therefore expects further house price declines and late stage mortgage arrears to rise."
