The Central Bank has warned that the risk of an unanticipated and sudden fall in residential property prices poses the greatest threat to the health of the banking system in the country.
The comment is contained in the bank's first ever financial stability report which examines the health of the financial sector.
The report indicates people are now spending more of their cash on paying back loans. Personal debt has doubled in the last ten years to 95% of personal disposable income.
The report says that the growth in personal sector credit reflects the growth in residential mortgages, which currently accounts for 80% of personal sector credit. This compares with 68% in the euro area.
First time buyers are the most indebted in comparison with their peers in the early years of the 1990s. The report says that the average mortgage repayment burden for first time buyers has increased from 23.7% in 1995 to 27.1% in 2004.
The report also said the retail banking sector had proved 'remarkably resilient' to the slowdown in growth rate of the economy over the last few years and that Irish banks remain 'adequately' profitable.
The Central Bank said the rate of increase in house prices remains very strong with new and second hand houses increasing by an annual rate of 14.7% and 10.8% respectively.
