Research by IIB Bank and the ESRI indicates that one in ten homeowners is enduring extreme pain from a rise in interest rates.
The bank has predicted that house prices will fall by up to 2.5% this year, but it has predicted prices could rise next year.
The bank also said the sharp rise in borrowing costs of the past year and a half was coming to the end of its cycle and could begin to ease next year.
The head of the mortgage and home loans division of IIB Bank today warned that although higher rates have been the key driver of a slowdown, a loss of confidence is now the biggest threat to the outlook for the Irish housing market.
Speaking at a mortgage broker conference this morning, Mr Tom Foley said the market has reached a critical point.
He advised that with some 'sensible' policies and some easing in pessimism, the Irish housing market should soon begin to reflect what is still a 'healthy economy'.
A report prepared by the bank's chief economist Austin Hughes says the sharp rise in borrowing costs are now coming to an end, and although one more rate rise can not be ruled out, it is likely the next ECB move will be a reduction.
The report says that 10% of borrowers would see a 'substantial deterioration' in their financial situation if interest rates rose by 0.5%, but 33% could withstand up to another 2% rise, with 75% expecting rates to rise by more than 1%.
Mr Hughes said that the Government needs to be careful to avoid an unnecessarily hard landing for the housing market.
He said a step-up of mortgage interest relief to 25%, rather than the standard 20%, would help as would broadening the relief beyond first-time buyers and also easing the burden of stamp duty with any changes backdated.
The report says the Irish economy remains healthy, with the population set to crease, and the dependence on house building is sometimes exaggerated.
The report found that the end of the rate rises, some confidence boosting measures and a reduction in supply suggests the market should stabilise by year end with house prices increasing 'modestly' as 2008 progresses.
