The housing market could face a "disorderly correction" if growth in prices and mortgage lending does not slow over the next two years, according to an analysis from Goodbody Stockbrokers.
A soft landing is still seen as a "distinct possibility" in the property market however.
This should come, Goodbody says, as interest rates rise over the next few years and help to control demand for mortgages.
The broker does not see any need for Government intervention in the market, warning that measures such as property taxes could create instability.
"The market will adjust itself," said Goodbody economist Mr Dermot O'Leary yesterday, pointing to healthy employment and wage trends as a fundamental long-term support for prices.
Goodbody is expecting interest rates to rise by half a percentage point next year and by a full percentage point in 2006, although Mr O'Leary acknowledged that the sluggish performance of some EU economies may not even merit this. An absence of interest-rate increases would, he believes, represent "the real danger for the housing market".
The amount lent by banks and building societies in mortgages is currently growing by close to 30 per cent year on year. The pace of this growth, which has been supported by historically low interest rates, has been a source of concern for the Central Bank.
Mr O'Leary yesterday described the current pace of credit growth as "scary". But, he said, current levels of credit are not overly "burdensome".
Continued growth of close to 30 per cent would however be more worrying.
The Republic could be the most indebted country in Europe by 2007, according to the Goodbody analysis. This would leave the Irish housing market open to shocks, Mr O'Leary said.
He sees apartments as the most vulnerable segment of housing.
Demand for this type of housing will wane over the next decade as the population "bubble" aged 20-29 becomes older and interested in larger properties, according to the study.
"There's a very big chance that prices will go down," said Mr O'Leary. But he noted that any fall in prices would happen gradually, with apartments in urban centres such as Dublin at less risk than those in other places.
Goodbody sees house prices climbing by 6 per cent in 2005 and remaining static in 2006. This will come as mortgage credit growth slows to 21 per cent next year and then to 14 per cent in 2006, the broker concludes.
Despite this, the study is based on new housing construction reaching a record level of 85,000 units in 2005. Beyond this, Mr O'Leary sees output falling slowly to pre-2000 levels.
