Property prices in Ireland could fall by another 20 per cent before hitting bottom, ratings agency Fitch has warned – on top of the almost 50 per cent decline to date.

Its outlook for property prices in Ireland is worse than for any other of the 12 countries assessed in its Global Market Outlook for Housing and Mortgage Lending, including the other peripheral states.

However, Fitch states that, in contrast to other markets, it has adopted a conservative approach in its assumptions about the downside risks to the Irish market.

“It is also conceivable that Irish prices stabilise sooner and at a higher level than Fitch’s base case assumption suggests,” the report says.

It also acknowledges the improvement in affordability, especially for first-time buyers not burdened by legacy debt, citing it as “the one bright spot in the Irish housing market”.

“For new buyers, first-time buyers, it is increasingly becoming a better market and one of the more affordable markets which we analyse,” said report author Andre Dahlkamp, adding that mortgage lending constraints are limiting the impact.

Overall, however, the agency expects prices to continue to decline, worsening by about 20 per cent over the next two to three years. This compares with a 15 per cent decline for Greece and Spain.

“Some signs of stabilisation are taking hold . . . However, market fundamentals still point to limited improvement in house prices in the near term,” the report states.

“While the pace of deterioration has slowed, Fitch cautiously . . . assumes a further house price correction over the next 12 months equal to around 10 per cent on a national basis.”

It adds: “The continued rise in arrears in Ireland is, in our opinion, to an extent driven by the imminent introduction of policy measures relating to debt forgiveness. Lenders are constrained from, or have been unwilling to undertake, large-scale repossession.

“Coupled with borrowers in arrears potentially benefiting from debt write-downs this has increased moral hazard.”