Rate rises will not signal property crash, says AIB

Interest rates across Europe could rise by as much as 0.75 of a percentage point next year but this does not signal any imminent threat of a crash in the property market, according to AIB.

The bank's chief economist, Mr John Beggs, is forecasting that European Central Bank official interest rates will rise from 2 per cent to 2.75 per cent after the second quarter of 2005, the largest rate rise predicted so far. Such an increase would trigger higher rates of interest being passed on to consumers, making outgoings such as mortgage repayments more expensive.

In a new report on the Irish economy, Mr Beggs suggested this was the worst case scenario and that the ECB could delay raising official rates by this amount if the dollar weakened more sharply than expected. The bank also assesses the wider outlook for the Irish property market and concludes that a "soft landing" is achievable.

The two chief factors that could cause a housing market crash are a significant deterioration in the labour market or a sharp increase in interest rates, it states. "Neither of these seems a likely scenario in the short term."

Another threat could come from a significant withdrawal of investor interest. New investors entering the property market at current high prices are facing significantly weaker yields as a result of lower rental incomes and higher prices on the expectation that they will make significant capital gains in the future.

Despite the potential threats, there are several factors that should provide support to the market and help to prevent a crash. "On top of the benign interest rate environment and robust labour market, there is still a high level of untapped demand from those currently priced out of the market."

Overall, AIB says there are undoubtedly risks to the Irish housing market with price inflation still relatively high, a surge in supply and substantial reliance on the investment market.

"However, we believe that comfortable affordability levels, continuing low interest rates and the improved economic climate, particularly a robust labour market, together with untapped demand, should cushion the market, allowing it to achieve a soft landing".

Mr Beggs is forecasting that the Irish economy should grow by a further 5.5 per cent in real terms in 2005, helped by stronger domestic demand and a solid contribution from net exports.