A survey of consumer attitudes conducted by the ESRI and IIB Bank has found that house buying intentions among Irish consumers are now at their lowest level for more than a decade.
The survey finds that, although 50% of consumers expect house prices to rise this year, 16% think prices could fall.
Changes in interest rates have emerged as the key influence on house prices, with 27% citing this as the most important factor compared to 23% indicating population and migration trends as most important.
The survey also found that consumers believe interest rates will rise by more than is currently expected by the financial markets.
According to the research SSIA holders have become more cautious with more intending to save or pay off debt, while fewer will invest in the property market or make major consumer purchases.
David Duffy, economist at the ESRI, said the current slowdown in housing market activity is reflected in consumers expectations.
'The majority of consumers, nearly 3 out of 4, expect that house prices will remain unchanged or only increase a little over the next 12 months,' he said.
He said the average increase in house prices expected by consumers in 2007 at 3.5% is nearly half the expected increase for 2006.
The report said that higher interest rates will clearly hurt borrowers but the extent of problems may be less widespread than is often thought.
As many as 150,000 borrowers will face some degree of adjustment because of higher interest rates.
'We reckon more significant difficulties may be faced by 40,000 borrowers who will see a notable squeeze on their spending power if interest rates continue to rise', the report said.
It is clear that Irish consumers have adjusted their SSIA spending plans as concerns about the economic outlook have increased', said Austin Hughes, economist at IIB Bank.
'It is quite striking that with about 50% of SSIAs already having matured and the remainder imminent as many as 1 in 4 consumers remain still undecided as to what to do with their cash.'
He added that: 'these results mirror greater uncertainty about economic prospects in general and investment in equities and the property market in particular.'
Mr Hughes said the survey did not suggest a dramatically poorer outlook for household finances, but that just over half of consumers don't expect a material deterioration in their household spending power.
He said this is partly because the pain tends to be concentrated among those with relatively large and recent mortgages, and it probably also reflects the offsetting impact of tax concessions in the past two budgets.
Mr Hughes concluded that while higher interest rates will act as an important restraining influence on the economy and the property market, this should not threaten a serious downturn.
