Further house price declines in Ireland are expected, Fitch reports. The declines to-date amount to 24% from the December 2006 peak, according to data from The Permanent TSB/Economic and Social Research Institute, and the agency now expects a total house price decline of approximately 45% from the peak of late 2006.

Alastair Bigley, head of Irish RMBS at Fitch, says: "Tax rises, high unemployment, wage deflation and property supply overhang continue to undermine the country's property market."

Ireland is undergoing one of the deepest recessions of all advanced economies. The agency expects real GDP to contract by 7%-8% in 2009 and the poor state of public finances has left the government no room to use fiscal measures to support the economy. Fitch anticipates unemployment to rise to 12.5% in 2009 and 15% in 2011.

"Despite almost three years of house price declines, prices have yet to reach a sustainable level of affordability," explains Douglas Renwick, associate director in Fitch's sovereigns team.

This will be exacerbated by an expected increase in the cost of funding to Irish financial institutions. The three main factors driving this increase in funding costs are:

• The cost of the EU's guarantee of banks' debt issuance is set to be more expensive than compared to the current Irish state guarantee.
• Inter-bank lending rates in Ireland have increased substantially and remain at higher levels than other international banks, reflecting market concerns over the creditworthiness of Irish banks and the Irish Sovereign.
• Increased retail deposit-taking will be essential as Irish banks rebuild their balance sheets, in the face of restrictions in other funding avenues and the ensuing competition for retail deposits will inevitably raise the cost of this funding route.

Irish mortgage borrowers have enjoyed interest rates that are among the lowest in the Eurozone for much of the past decade but, to date, banks' increased funding costs have largely not been passed on to consumers. Therefore, Fitch believes it is inevitable that higher interest rates will be passed on.

Michael Greaney, associate director in Fitch's RMBS group, says: "Fitch expects all lenders to increase their mortgage rates and it seems certain that mortgage affordability will suffer against a backdrop of a generally higher tax burden, increasing unemployment and negative to zero wage inflation. Fitch therefore expects further house price declines and late-stage mortgage arrears to rise."

House prices started to fall in January 2007 and have fallen month-on-month since then. They currently stand at approximately 24% down from the peak.

Fitch estimates that the current average house price is 7.5x the average income in the country. The agency expects this ratio to revert to nearer 5.5x average individual income, which would equate to a 45% fall from peak house prices.

For the house price to income ratio to fall in line to the same ratio for the UK, which does not have a similar supply overhang problem, Fitch estimates peak-to-trough declines of over 50% would be needed. A fall of 45% would take house prices to levels seen in Q4 2000. Irish house prices rose approximately 100% from the start of the decade to the peak in December 2006.

Fitch is currently in the process of reviewing its ratings of all Irish RMBS transactions and will comment further in due course. The performance of Irish sub-prime transactions is of particular concern on the back of mounting arrears and inability for borrowers to refinance, the agency says.