AIB Capital Markets says it has raised its forecasts for house prices and house building as demand remains strong.
In a report on the sector, AIB says it expects close to 77,000 homes a year to be built until 2008. This is similar to last year's record level. It adds that annual house price inflation should stay at a relatively high 7% in the same period. This compares with the bank's previous prediction of a slowdown to 2% growth by the end of 2006.
AIB cites exceptionally strong demand, particularly from first time buyers, and strong population growth as factors in the continuing strength of the housing market.
'The soft landing to price stability that we envisaged in our last report could be postponed until 2008,' it says.
On concerns about debt levels, AIB says affordability is 'comfortable' and will remain so even if interest rates rise by half a percentage point next year. But it warns against tax changes in the sector, describing these as the greatest threat to the sector.
The report also says that current high levels of housing output can be justified only on the basis of 'sustained sizeable net inward migration'.
In a separate report on the economy, AIB predicts that the Irish economy - as measured by GDP - will grow by about 4.5% this year, accelerating to 5% in 2006 and to 5.5% in 2007. Unlike the previous two years, the growth will come from domestic demand rather than exports.
The bank expects consumer spending to grow by more than 5% this year, speeding up to 6% in 2006 and by as much as 8% in 2007. 'Much of this growth will be fuelled by a fall in the personal savings ratio following the ending of the SSIA scheme,' the report says.
It says inflation is on the rise because of higher energy and mortgage costs, but this will be offset by downward pressures arising from international competition and technological change.
AIB also argues that fears of a slump in productivity based on recent figures have been too negative, pointing out that Ireland is moving towards a service economy which will probably mean slower overall productivity growth.
