Prices of houses need to fall to 2005 level - AIB

House prices need to retreat to their 2005 levels to restore momentum to the market, according to Ireland's biggest bank.

An AIB Global Treasury market update, published yesterday, says that overall house prices were down 7.3 per cent year-on-year in December, with further drops anticipated.

The bank says that last year's sharp downturn stems from the fact that house prices became too expensive during 2006, resulting in a significant drop in demand and too many homes coming on the market. Increasing interest rates aggravated this situation.

The report points out that existing house prices fell by 9 per cent last year, while new homes were down 4 per cent, a result of the fact that builders were more likely to offer incentives other than low prices to lure buyers.

AIB says that further house price falls will make homes more affordable.

"Overall, our analysis indicates that a fall in prices of around 15 per cent from their peak - at the start of 2007 - could well improve affordability conditions sufficiently to restore some momentum to the Irish housing market," the report says.

The bank states that a fall of this level would restore prices to their autumn 2005 level, unwinding the surge in values that began at that point and continued for a year.

AIB Global Treasury predicts that the housing downturn will bottom out in 2009/10, helping to restore economic growth, which it predicts will weaken to 2.5 per cent this year from 5.5 per cent last year.

Meanwhile, stockbroking firm Davy estimates that builders started work on just 32,141 new houses in the 12 months ended in January, a new low according to its economist Rossa White.

In a research note, Mr White says that new house starts have been running at less than 40,000 year-on-year for the last three months.

Its estimates of the number of new homes being built are higher than in previous months, but this is because it included once-off housing for the first time in its January calculations.

Mr White said the fall in the supply of new homes coming on the market allied with sharp falls in price will help to bring buyers into the market.