The Government should not engage in artificially propping up either house prices or building activity, according to the Economic and Social Research Institute.
In its latest quarterly economic commentary, the institute has significantly reduced its economic growth forecasts as a result, and now expects the economy to grow by less than 3% next year.
Its report says the slowdown in house building is far sharper than expected, while house prices by December could be 15% lower than last year and mortgage repayments could rise further. The ESRI also says the possibility of a banking collapse needs to be recognised, and the rapid growth in Government spending needs to be halted.
The ESRI is forecasting 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 and by artificially propping up house prices or building activity.
The report forecasts only 12,000 new jobs 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 represent significant threats to the Irish economy.
Responding to the ESRI report, a spokesperson for the Tánaiste and Minister for Finance said that other figures published this week, particularly those from the Central Statistics Office, were more optimistic about the Irish economy.
He said the Department of Finance would be publishing its own revised growth figures in the pre-Budget outlook in a few weeks time, but that even the ESRI's forecast showed Irish economic growth ahead of the EU average.
