Only 40% of households would now qualify for a mortgage on an average new home, according to the Central Bank.
Its financial stability report also shows Ireland is the most heavily indebted country in the OECD.
In comparison, the Central Bank last year found that 50% of all households would be eligible for a mortgage on an average new home.
Residential properties are also becoming less attractive for investors with house prices levelling off.
Rental income now covers just 66% of mortgage repayments on new houses.
This is significantly down from two years ago, when there was just a 16% shortfall.
The governor of the Central Bank says the Irish financial system is robust, with strong banks, and is not exposed to the sub-prime crisis in the US.
However, he said Ireland's private sector is one of the most heavily indebted in the developed world.
