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Housing prices in Dublin cause jitters

Dublin - Soaring house prices in Dublin prompted fears of a new property bubble in Ireland this week. But central bank measures to counter the trend stoked experts' optimism about an economic resurgence in the country.

As Ireland prepared to release its annual budget, the central bank announced measures this week to reduce the risk of a new property bubble emerging just six years after a devastating crash.

House prices in the country are spiralling, with a 25% year-on-year rise recorded in Dublin in August.

While renewed growth in the housing market is seen as a sign of economic resurgence, there are fears of a repeat of the property bust that led to the demise of the so-called Celtic Tiger period.

The country was forced into a three-year bailout programme in 2010 - overseen by the European Union and the International Monetary Fund (IMF) - and imposed several consecutive austerity budgets.

There is "concern that the market is getting back to a place where some borrowers are taking out loans where their ability to repay is tenuous," central bank head of regulation Cyril Roux said Tuesday, outlining measures to prevent a new property bubble.

Although the government is expected to present its first "neutral" budget this month - with no tax hikes or cuts to public services since 2008 - the effects of austerity are still being felt in public sector institutions such as schools and hospitals.

Unemployment remains high at 11.1%, with recent decreases in the jobless rate attributed to continued emigration rather than significant levels of job creation on a domestic level.

The proposed measures will ensure banks extend no more than 15% of their housing lending to borrowers asking for loans worth more than 80% of the value of a home.

No more than 20% of loans can be valued higher than three-and-a-half times the borrower's income.

Banking analyst Diarmuid Sheridan of Davy Stockbroker's in Dublin welcomes the new measures.

"These restrictions have identified high loan-to-value lending as the riskiest type of lending," he says. "The restrictions should strengthen the resilience of the banking and household sectors to residential property-related downturns."

The banking analyst does not feel that the current housing boom is similar to the situation during the Celtic Tiger years of the late 1990s to the mid-2000s.

"Lending is still quite low," he says. "Cash purchases account for 50% of investment."

The latest quarterly commentary from the influential, independent think tank the Economic and Social Research Institute (Esri) is upbeat about Ireland's economic growth.

It predicts gross domestic product (GDP) growth of 4.9% this year and 5.2% next year. It also expects unemployment to fall to 9.6% in 2015.

But the Esri is urging the government to use any additional taxes, such as money from water charges, to invest in social housing programmes.

Esri's Kieran McQuinn co-author of the report released Wednesday said: "I think the main concern in the housing market ... is supply. I think that is one of the reasons why we suggested the stimulus in terms of social housing, because we believe if properly constructed it could also have the positive spillover effect of increasing supply generally within the market."

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