AIB warns house prices could fall by 2%

AIB warned yesterday house prices could fall by 2% from their present levels by the year end.

In a new review of the housing market the bank’s chief economist John Beggs, warned the market was entering a crucial period in the months ahead.

However, Mr Beggs said if prices fall 2% this year it would still constitute a soft landing.

The bank’s warning follows the earlier announcement that the European Central Bank had raised its key rate to 4%, its eighth rise since December 2005. One more interest rate rise in expected in September.

Most analysts hope that will be the top of the cycle, but they fear the bank will be tempted to introduce further increases to keep inflation in check.

With Europe growing nearly three times the US rate, ECB president Jean Claude Trichet disclosed a number of concerns yesterday.

He is worried the current boom in Europe could tempt businesses to raise their prices across the board which would send inflation back over 2% in the months ahead and undermine Europe’s strong economic growth.

Money supply concerns have raised fears that demand for goods will increase strongly forcing inflation back over 2%.

Some EU member states including France and Italy have openly questioned the ECB’s policy of continuing to raise rates.

However, analysts accept that in the short term the hawks in the ECB, which include Mr Trichet and the German Bundesbank, will have their way in the short term and that a rate level of 4.5% cannot be ruled out.

In a separate note on interest rates AIB warned rates could rise to 4.75% in 2008 if eurozone output is maintained at current levels.

Meanwhile Northern Rock and Anglo Irish Bank announced they were increasing their deposit rates with immediate effect in response to the change in rates by the ECB.

On the housing question AIB said house price inflation was falling sharply.

Nationally prices fell for the second month in a row in April according to PermanentTSB while prices have been virtually stagnant in the opening months of 2007.

Mr Beggs revised downward the forecast for house prices inflation at the end of 2007.