AIB has revised upwards expectations for house-price inflation over the next three years to an average of 7 per cent per annum driven by "very firm demand", the bank said in a report today.
In its quarterly outlook on the Irish economy, the bank's capital markets division said it anticipates house compilations of about 77,000 a year until 2008.
The bank's latest forecast revises upwards an earlier prediction of house price growth slowing to less than 2 per cent by 2006.
Demand from first-time buyers and swift population growth due to inward migration are maintaining the house price boom and a soft landing to price stability envisaged by the bank "could be postponed until 2008", the bank says.
But the bank notes that the current high levels of housing output can be justified only on the basis of "sustained sizable net inward migration".
Based on this view, AIB says in the medium term the "economy needs more and not less construction".
The bank's report acknowledges that the construction industry's share in total employment will undoubtedly fall in due course.
With regard to debt, AIB says house affordability remains comfortable and could absorb a half a percentage point interest rate rise next year. However it warns against tax changes in the sector in the Budget which it believes would pose a serious threat.
It notes that concerns over falling productivity are overly negative and do not take account of the fact that Ireland is moving towards a service economy.
Over the next two years AIB expects consumerism to drive economic growth. This year it anticipates consumer spending rising by 5 per cent this year, 6 per cent in 2006 and by up to 8 per cent in 2007.
Looking towards the Budget the bank calls for a "prudent stance" based on the strength of domestic demand and the "likely impact of SSIA funds over the next two years".