Standard & Poor’s has forecast Irish house prices to increase by 4 per cent this year, with a shortage of supply in urban areas exerting upward pressure on prices.

However, the ratings agency said it doesn’t expect the housing market revival to stay as strong beyond 2014, due to tight bank lending conditions and high mortgage arrears.

It expects home prices to rise by 2 per cent in 2015 and by 3 per cent in 2016.

Noting the housing market in Dublin is racing ahead of the rest of the country, S&P said: “prices are now 26 per cent higher than their low point in August 2012, compared with just a 3.2 per cent rise in the rest of the country from their low point in March 2013”.

The agency said home prices for the country as a whole are still 45.1 per cent lower than at their boom-time peak in September 2007.

The most recent data from the Central Statistics Office shows house prices increased 10.6 per cent year on year in May on a national basis, after gaining 6 per cent in December 2013. However, the upward trend was led by Dublin, where prices climbed 22 per cent over the same period. Outside Dublin, residential property prices are recovering only sluggishly, with annual prices growth reaching 1.8 per cent in May.

S&P said the Irish economy will benefit this year from the improving external demand from its main trading partners, the US and the UK.

“This recovery may widen to domestic demand and, notably, to investment from next year, driven by global demand cycle. As a result, we forecast that unemployment will drop significantly to 9.7 per cent on average in 2016”.

S&P took a dimmer view of the French housing market, forecasting house prices there to fall by 4 per cent this year as a result of rising unemployment and a weak economy. With regard to the UK, the agency said it expects house price to rise by 7 per cent this year.