Economists forecast 8.6 per cent annual increase in house prices

A group of Irish economists is forecasting that house prices will rise by 50 per cent over the next five years, according to the annual property survey by Finance magazine.

The economists do not envisage a "hard landing" in the form of a recession affecting house prices between now and 2005. On the contrary, they expect prices to rise by 50.6 per cent, the equivalent to an annual average increase of 8.6 per cent.

The price rises forcast are lower than in two previous surveys conducted by Finance. In the same survey 12 months ago the five year forecast was for a 60 per cent increase while in 1999 the growth was forecast at 90 per cent.

This week's survey comes at a time of considerable uncertainty in the housing market when many homes are failing to sell at auction and a large number of buyers have cut the asking price in the hope of selling. Sales of new homes has also slowed down significantly, in many cases because they have already gone beyond the reach of first-time buyers.

Finance magazine estimates that middle ranking homes in the £500,000 to £2 million bracket have fallen in value by between 20 and 25 per cent in the past 12 months. It says the market under £500,000 is expected to reflect this trend in the coming months but rather than showing declines as in other sectors, is expected to show a gradual levelling out in inflation.

Excluding this year, which is forecast to show a still substantial increase of 14.6 per cent increase in prices over 2000, the survey indicates an annual average increase in house prices of just over 7 per cent a year in the four years between 2002 and 2005. Such increases, with long term euro interest rates standing at below 6 per cent, would still indicate that purchasing one's own home is still the right option for first time buyers starting out in the Irish economy of 2001, according to the magazine.

Responding to the survey, Eunan King of NCB said the slowing pace of house price inflation in the first quarter was temporary and was due mainly to the foot and mouth outbreak and a short term dip in confidence.

Austin Hughes of Irish Intercontinental Bank said that a quick return to very strong activity in the economy could be expected to at least underpin or cause a small acceleration in house price inflation for the remainder of the year.

Jim Power of Friends First forecast that the demand for housing would remain strong due to the continued increase in household formations, limited inward migration, increased rates of divorce, a 4 per cent increase in real disposable incomes and low interest rates. He said that while the imbalance between supply and demand was slowing, it would remain a driver of house prices over the next five years.