House prices will fall by 10 per cent next year as economic growth declines to 3 per cent, according to Friends First, the financial services group. The sharp and sudden economic deterioration "could spell trouble for some house owners", according to Mr Jim Power, chief economist with Friends First.

Those with relatively new mortgages who paid a high price for a property are most exposed, he said. The current low level of mortgage rates offers some security, but low rates are "irrelevant in an environment where jobs are lost", according to Outlook For The Irish Economy 2002, published yesterday by Friends First.

Mr Power's prediction of 3 per cent growth is in the middle range of private sector forecasts. More optimistic forecasts assume a strong recovery in the US from the middle of next year and "are subject to considerable downward risks".

A swift US recovery cannot be taken for granted "given the range of uncertainties that currently exists, in particular the ongoing war in Afghanistan and the possibility of further terrorist atrocities", he said. However, Mr Power expects that the US economy will recover in the second half of 2002, but perhaps not as strongly as some are predicting.

Friends First has also called for the Government to divert resources away from the fledgling National Pensions Reserve Fund to capital investment in infrastructure products. The Government's decision to invest 1 per cent of GDP this year in the fund "is ill-judged at a time when we urgently need to stimulate economic growth", said Mr Adrian Hegarty, Friends First group chief executive.

However, the Irish Association of Pension Funds (IAPF) supported the Government decision. "This is a long-term problem and can only be solved by tackling it early and defusing it over time," said IAPF chairman, Mr John Feely.