A report from ratings agency Standard & Poor's has warned that a sharper slowdown in the construction sector may cause economic growth to slow rapidly next year to perhaps as low as 1%.
The housing market report, which singles out Ireland, Spain and the UK, warns that prices are estimated to be at least 30% overvalued in these countries, and with the downturn already in evidence, the correction could be drawn out.
The report says the slowdown will hit economic growth to varying degrees, with Ireland and Spain suffering the most due to their dependence on the construction sector.
'Our base case indicated that Ireland and Spain will likely take the most significant direct hit , while the UKs more diversified economy which is currently experiencing a less stark moderation in house prices and construction sector growth, should weather the storm to a greater degree', the report says.
S&P expects the Irish economy to grow from 5% this year to slightly less than 4% next year, but also warns that a sharper slowdown in the construction sector may cause growth to slow more rapidly to perhaps 1% in 2008.
The report says that despite the already evident slowdown in housing starts the main effects will only be felt from 2008, as first-half 2007 economic growth was relatively robust in the three countries.
'In Ireland and Spain economic growth could take until closer to 2015 to gain the growth rates expected in 2008 due to the relative size of the construction sector', it says.
The rating agency says that the three economies will experience worsening fiscal positions, based on an assumption of unchanged spending plans given as property related revenues have passed their peak.
There is some good news, however, as the report says that on the issue of public finances Ireland is the best placed to adjust to adverse economic trends.
It says that relatively low government debt and higher revenue raising potential in Ireland and the UK, plus a government surplus in Ireland and Spain, allow for some fiscal flexibility to assuage the effect of the reduced contribution from the construction sector.
It points out that the Irish government is already attempting to manage down expectations ahead of the December 2008 budget,as the impact on tax revenue is already becoming apparent as the housing market slows.
Dreamt O'Leary of Goodbody Stockbrokers said today that the international coverage of the S&P report is bound to ensure that the Irish stock market remains out of favour with investors in the short term.
'Friday's house completion data fell by 23% year on year, there is reason to believe that risks are increasing for our 2008 construction forecasts', he said.
He added that in the quarter to August, housing commencements fell by 46% year on year, mirroring trends in the registrations data down 52% in September.