The Government is being urged not to artificially prop up either house prices or building activity.
A report by the Economic and Social Research Institute indicates a sharp decrease in house prices before the year's end.
In its Quarterly Economic Commentary, the institute has significantly reduced its economic growth forecasts and now expects the economy to grow by less than 3% next year. The slowdown in house building is also far sharper than expected.
House prices could be 15% lower than last year by December, mortgage repayments could rise further, the possibility of a banking collapse needs to be recognised, and the rapid growth in Government expenditure needs to be halted, according to the report.
The ESRI report also forecasts a 2.7% growth rate for next year. The institute says the housing slowdown is the dominant influence but that it is part of a process of returning the economy to a sustainable growth path.
As a result the Government should not interfere in the situation, according to the institute.
The report forecasts only 12,000 new job additions in 2008 compared with 80,000 in recent years. It also expects inward migration to drop sharply.
The ESRI says the slowdown in the US economy and the weakness in the value of the US dollar in particular also represents a significant threat to the Irish economy.
Fine Gael has claimed the report is a 'painful wake-up call' for the Government, which exposes the alarming fragilities that have emerged in the Irish economy in recent years.
Finance spokesperson Richard Bruton claims Fianna Fáil have acted as incompetent economic managers 'intoxicated by five years of easy credit, soaring property prices and a booming construction sector'.
He said the Government's economic reputation rested on the shaky foundations of a debt-fuelled housing boom, which the Government did nothing to control.
Mr Bruton urged the Government to restore competitiveness, control public spending, and avoid 'savage stealth taxes' on families and businesses.
