The Republic is one of a small number of countries where sharp increases in house prices have raised fears of an asset-price bubble that could lead to market collapse, according to the International Monetary Fund (IMF).

The latest economic analysis from the IMF renews an earlier warning that Irish house prices have climbed too far in too short a period and could be set for a severe price correction.

This could damage economic growth and financial stability, even if house-price gains look to be justified on a fundamental basis, according to the IMF.

Real house prices in the Republic have risen more than 50 per cent over the past five years.

The Republic could feel particularly negative effects from a decline in prices if it is triggered by rising real interest rates, the IMF said.

This is because of the high incidence of variable-rate mortgages among Irish home-owners and the instant pain that these consumers would feel if rates rose.

This in turn would damage consumption across the economy, as the level of disposable income needed to service mortgage repayments would increase.

Global recovery is fuelling expectations that interest rates are set to rise over the coming year, focusing attention on housing, which has benefited from low borrowing costs.