A quarterly analysis of the housing market has revealed that house prices were down 9.4 per cent this year to July, and are now back at levels not seen since November 2005.

Bank of Ireland's quarterly analysis of the Irish property market, the Irish Property Review reveals that while there is still significant market correction, the pace of mortgage slowdown has eased and while house prices are falling they are doing so at a reduced pace.

Commenting on the review, Dr Dan McLaughlin, Chief Economist, Bank of Ireland said, "The housing market is still in the throes of correction and it may well be 2009 before signs of stability emerge, particularly in the wake of the ECB rate rise in July. However, affordability has improved in the last 18 months and the ratio of house prices to income is expected to fall further to 5.8 per cent in 2009, which would take it back to the levels existing just prior to Ireland entering the European Monetary Union."

Mortgage lending continues to slow, reflecting a combination of weaker demand and constrained supply, with banks tightening credit standards in response to the credit crunch. Gross new mortgage lending has fallen by 13.4 per cent in the year to the second quarter of 2008. Interestingly though the number of new mortgages drawn in the same period has picked up to 35,000 from under 29,000. The pace of growth in the outstanding mortgage stock also continues to slow to 9.6 per cent. As a result the Review forecasts that mortgage lending growth will end the year at around eight per cent and that gross lending will amount to €29 billion from €33.8 billion in 2007 remains.

The supply response to falling prices has been substantial, which is ultimately supportive of the market, completions fell to under 28,000 in the first half of the year and still look set to reach 50,000 at best compared to 78,000 in 2007, which would be the lowest percentage addition to the housing stock since 1996. Moreover, leading indicators of housing starts imply that the first half of 2009 may be weaker still, and Bank of Ireland forecast under 40,000 completions next year.

House prices are still falling and with the steady decline prices are back to what they were in November 2005. Yet the monthly fall was only 0.2 per cent and the annual pace of decline also slowed, this time to 9.4 per cent from 9.7 per cent. As a result, Bank of Ireland projects an 8 per cent fall for the full year.

Regarding commercial property, where the market is re-pricing capital values in response to increased economic uncertainty and the credit crunch, the bank now expects a 16 per cent decline in total returns in 2008, taking yields above five per cent.

Dr Dan McLaughlin continued, "Sentiment and expectations can change, but the current economic backdrop is clearly negative, given weak consumer confidence, a rise in unemployment and persistently high inflation, which is eroding real incomes. On a more positive note, inflation may have peaked, given the recent fall in oil prices and the market is now pricing a rate cut by the ECB in the first half of 2009, which would be positive for the market."

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