House prices could rise by 20% in real terms over the next three years, because of strong economic growth and only a modest increase in house building.
However, research by the Economic and Social Research Institute says Irish houses are not overvalued, and the housing market is not yet overheating.
The ESRI’s research looks at the relationship between housing demand and key economic variables like income levels, interest rates and demographics – often called the fundamentals.
Using several methods, and comparing the results to international data, the ESRI says fundamental house prices here are in line with international standards, and that by some measures, such as price to disposable income, housing affordability is on the low side.
Given the forecasts for continued strong economic growth, and only a slow increase in housing output, the ESRI thinks house prices will go up by another 20%.
If interest rates increase by one percentage point, house prices will rise by 14%.
It says the authorities should not do anything to make it easier for people to borrow more money, as this would drive up prices further, and it warns that an increase in credit supply from the banks could make the situation worse.
The Director of the Nevin Economic Research Institute says a rise in homelessness is inevitable as house and rent prices continue to rise.
Speaking on RTÉ’s Morning Ireland, Tom Healy agreed that a 20% increase in house prices over the coming years is quite likely.
However, he said that this was not affordable for the average worker.
Mr Healy said there was “not a chance” that people on just above the national minimum wage could afford to buy anywhere in Dublin.
He said more competition in the housing market was needed and the State needed to take the lead and enter the market much more proactively.
In addition a long-term sustainable rental market needed to be developed, he said.