Predictions of an imminent collapse in the housing market are based on an incorrect analysis of the market, according to research by economist Dr Maurice Roche, published in today's Economic and Social Research Institute quarterly bulletin.
New houses are "more or less" at their correct value, Dr Roche's analysis suggests and the market is overvalued by a maximum of 5 per cent.
Pessimistic predictions earlier this year of a collapse from the International Monetary Fund (IMF) and the Economist magazine "are, at best, unwarranted and based on inappropriate models and, at worst, they are sensationalist", he says.
However, policymakers do need to address the issue of rising land costs, he said, as the land component of house prices had increased by more than 400 per cent since 1995.
Separately, research undertaken by the Central Bank indicates that property prices could be overvalued by around 10 per cent, still a modest figure after the huge gains of recent years.
The property market remains a "continuing area of concern", according to the Central Bank's latest bulletin, but the market was more likely to plateau out than collapse.
The analysis by Dr Roche of NUI, Maynooth, argues that more pessimistic commentary by the IMF and the Economist was based on an incorrect analysis.
The IMF warned earlier this year of a "significant risk" that house prices were overvalued,warning the market would be vulnerable if unemployment was to rise.
A statistical analysis undertaken by the IMF said it was impossible to state conclusively whether that was a bubble and attached "health warnings" to an assessment that prices could be overvalued by between 1.6. per cent and 50 per cent if recent trends in demand in the economy were not sustained.
Meanwhile, the Economist forecast that the market was overvalued by 42 per cent and that prices would fall by 20 per cent over the next four years.
Dr Roche contends that both the IMF and the Economist failed to take into account fundamental factors, particularly changes in supply, when framing their predictions.
The irony, he said, was that if enough people believed predictions of a collapse, then there was a risk it would happen. His figures show that there may have been a bubble in the late 1990s, but that, in the meantime, prices have returned to a fair value.
The Central Bank, which warned in its last bulletin about the risk of a "disruptive adjustment" in house prices, is taking a a slightly more relaxed view.
Dr Michael Casey of the Bank said the pick-up in growth reduced somewhat the risks facing the market. While the Bank continued to have some concerns about prices and borrowing trends, "we are certainly not talking about a collapse".
House prices might "plateau" in the near future, he said, helped by increasing supply in the market, although predicting the timing of this was difficult.
However, Dr Casey said the Bank did have concerns about some aspects of the housing market.
Building costs - in terms of labour and materials - had increased by 80 per cent between 1992 and 2003, he said, but house prices had risen by 300 per cent over the same period. This suggested there may be problems in the market in areas such as planning and land supply.
Dr Roche's analysis also says that policymakers need to focus on land supply, with land costs now accounting for 23 per cent of the cost of a new house, up from 13 per cent in 1995.
