HOUSE PRICES in the Republic are showing signs that they are about to stop falling, National Irish Bank said yesterday.

Dr Ronnie O'Toole, chief economist with National Irish Bank (NIB) said the decline in new home building is entering its second year, with all indicators suggesting a sharp slowdown in activity this year.

"While supply continues to retrench, there are signs that housing demand might finally be stabilising," Dr O'Toole said.

"House prices are bottoming out some 15 per cent off their peak 2006 levels and a more normal level of activity will return to the market in the second half of the year."

On the demand side of the equation, he said that immigration is continuing, though at a slower rate than during 2006 and 2007.

Rents grew by 9.5 per cent last year, although this slowed during the final six months of 2007 as more properties became available.

"Earnings remain strong while budgetary reforms and falling interest rates will boost affordability," Dr O'Toole predicted.

He added that interest rates are unlikely to fall before September, as the European Central Bank (ECB), which ultimately determines borrowing charges and thus mortgage costs, is unlikely to cut its key rates while Eurozone inflation remains high.

It is currently running at 3.5 per cent, above the ECB's 2 per cent target, so the bank is more than likely to delay any rate cut to September. It was originally thought to be likely to cut rates in June.

Dr O'Toole forecasted that the first cut would be one quarter of 1 per cent and added that the ECB should follow this with two more cuts on the same scale next December and in March 2009.

Overall, Dr O'Toole said that the building slowdown will drag economic growth back to 2.9 per cent this year from 5.3 per cent in 2007.

He pointed out that foreign direct investment, a key driver of growth in the Republic, remained strong. However, he pointed out that there was anecdotal evidence of a slowdown in the rate at which financial services companies are entering the State. Dr O'Toole said this is a result of market volatility and the credit crunch.

An IDA Ireland spokesman told The Irish Times that the agency has secured three investments from multi-national financial services companies during the first quarter, Unum in Carlow, Citco in Cork and Northern Trust in Limerick.

During the same period in 2007, the IDA secured just one financial services-based investor.

Dr O'Toole said that continued export growth would help offset stagnant domestic demand.

He estimated that overseas sales of goods and services produced in the Republic would grow by 6.4 per cent this year, "which remains a very good performance", he added.