Bank of Ireland’s quarterly analysis of the Irish property market, the Irish Property Review, reveals that the Irish housing market is cooling in the ’soft’ manner, as predicted.

2006 now looks like a cyclical peak for the market in terms of growth, although an abrupt change in market conditions is not expected - house price inflation will be around 3% in 2007, completions may well exceed 80,000 this year, gross mortgage lending for house purchases will again be around E25bn (comparable to the recent Irish Banker’s Federation data of E40bn for 2006, which includes re-mortgages and top-ups), and the growth in the level of outstanding mortgage debt will still rise by around 20%.

However, house price inflation has slowed, with prices rising by just 0.3% in the three months to January, although the annual change was still over 10%, with Dublin holding up better than the rest of the country - prices in the capital rose by 1% over the three months, and by 14.7% in the year.

Commenting on the findings of the Review, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland said: “The macro-economic backdrop has not materially changed of late; employment grew by 85,000 in the twelve months to November 2006, accompanied by a similar growth in the labour supply, in turn augmented by substantial immigration. There has been a series of high profile redundancies over recent months but these layoffs are in line with the five year trend which has seen redundancies running at over 20,000 a year. The 2007 Budget also provided a substantial fiscal incentive for first time buyers, with a couple now allowed to offset E16,000 of mortgage interest against tax. Moreover, private sector rents rose by over 10% in the twelve months to February, which clearly implies that the overall demand for housing remains strong and that rental yields are beginning to rise.

On the mortgage side, we expect gross lending for house purchase in 2007 to be broadly unchanged on the 2006 estimate of E25.7bn, with a fall in the number of new mortgages offset by a further rise in the average size of a mortgage. This level of growth reflects our expectation of a fall in house completions, which we now expect to come in at 82,000, from our previous forecast of 85,000, although data on employment in construction would not point to a sharp contract in constructions output overall. As a result, we also predict that gross mortgage lending, including re-mortgages and top-ups, will also be broadly unchanged at just under E40bn”, concluded Dr. McLaughlin.

Expectations of a reduction in stamp duty may be a factor in persuading some people to postpone purchase, expectations that are unlikely to be dampened in the current pre-Election period, but a more fundamental factor is affordability, which is expected to deteriorate further into 2007 and 2008, before improving subsequently.

Mr. Joe Larkin, Director Personal Lending, Bank of Ireland said: “As previously highlighted, we expect a continuing affordability impact in 2007/08 due to higher interest rates. However, with a more subdued 3% house price inflation forecast for 2007 and an expectation that 4% may be the peak of the rate cycle, consumers can expect to see income outstripping these factors over the next couple of years, allowing a degree of ‘catch up’ between average incomes and average mortgage costs.

From a broader economic perspective, one should note that there are far more savers than borrowers and that aggregate interest payment on debt is still relatively low; we estimate that the cost of servicing residential mortgages and non-mortgage personal debt amounted to 7% of household disposable income in 2006″, concluded Mr. Larkin.

The commercial property market performed very much in line with forecasts for last year, with the return of 27.2% compared to the BOI 28% projection. Again, the cycle has peaked, and a 12% forecast return for 2007 is predicted, as there appears to be little further scope for yield compression in the Irish market.”