A large reduction in the scale of house building is forecast by the Economic and Social Research Institute in its latest Quarterly Economic Commentary.

The ESRI warns that the Exchequer stands to lose a large amount of tax revenue as a result.

It says that houses are currently overvalued by 15% and warns that investors may pull out of the market now that house price growth has slowed.

The house building industry, which currently employs almost one in four men in Ireland may be in for a larger than expected setback as house prices slow, according to the analysis.

The ESRI estimates that a quarter of all new homes built in Ireland over the past five years were for second dwellings and holiday homes.

It says that many of these second dwellings may have been speculative investments encouraged by the prospect of rising house prices.

The ESRI also says that the Irish economy has been losing competitiveness and that it is now imperative to halt this trend.

However, despite the expected slowdown in housing investment the institute still expects the economy to grow by 5.4% this year.