SLIP-SLIDING AWAY: The Irish relationship with property is a complex and emotional one, long celebrated in song, story... and also on John Hinde postcards

A European Commission report which suggested that Irish house prices may be undervalued by 13 per cent, didn't really surprise too many people.

They look at how house prices have stopped falling in nearly all parts of the country. They read about a supply shortage in Dublin and a house price gain last year of around 13 per cent in the capital. And they conclude that the report may well be right.

The report was based on an equilibrium price, which looks at disposable income, population and the real mortgage rate. Essentially, it is an academic exercise based on a formula and data. These are very useful indicators of the likes of house prices, but they don't always mean things will play out to plan.

In other words, the property market won't always do what it is "supposed" to do on paper. Nobody knows that better than we do here in Ireland. The theoretical models suggested house prices were overvalued several years before they actually came crashing down. Confidence, human nature, external surprises and a mixture of greed or sheer panic, can separate reality from the theory.

The European Commission conclusion is not all that different to the findings of a paper published by two economists in the Central Bank back in May 2012.

They concluded that there may have been an over-correction in the Irish property market resulting in an undervaluing of houses by between 12 per cent and 25 per cent.

This paper was met with a wall of pessimism, as many felt, just two years ago, that Ireland would be like Japan with house prices falling for nearly two decades.

Some within the property sector greeted the paper from the Central Bank economists with a sense of elation, having been battered by bad news for five years at that stage.

The fundamental problem with interpreting these studies is that the residential property market is so varied. Two years ago, could you conclude that an apartment in Roscommon or Cavan was 12 per cent to 25 per cent undervalued? I don't think so. But perhaps the figure was spot on in relation to a three-bedroom house in Ranelagh in Dublin.

Distilling the entire market down to a single percentage figure helps us all discuss the property market over a pint in the pub, but it doesn't really help much with making predictions that might inform buyers' or sellers' behaviour.

Back in the 1990s, before the big boom/bust, it was fair to say that the property market was relatively uniform in movement, if not in value. So if the market was going up, it went up more in Dublin and the rest of the country followed to a similar, but slightly smaller, degree.

Post the crash, different markets are developing. In some parts of the country, houses and apartments in particular are still not shifting. In other places, they are shifting but at very low prices. Elsewhere, they are rising in value.

But you also have to remember that percentage increases can be a little misleading when values fall very low.

For example, take an apartment in a small town in the Midlands. Let's say it was valued at €150,000 at the height of the boom and had fallen in value to €50,000 at the bottom of the crash. Its value would only need to go up by €6,000 to €56,000 to register a 12 per cent price rise. It would still be a very long way from the €150,000 boom- time valuation.

House prices are supposed to be linked to the fundamentals in the economy, and to a certain extent they are. But other factors come into play, including changes in the fundamentals themselves. So, for example, interest rates are incredibly low right now but will they remain so? The euro crisis has abated, but has it really been solved, especially when you look at the work still to be done in places like Italy?

The really big question now is whether anyone should actually buy a home or an investment property on the basis that it might increase in value by 12 per cent or 13 per cent. If Irish people are still using a possible 13 per cent appreciation in value as a reason to purchase a home or make a long-term investment in a rental property, then we have learned nothing over the last seven years.

Buy the house if it makes sense for your needs at this point in time and possibly into the future. If it rises in value, so be it. Factor into your purchase decision the possibility that it could also fall in value.

There is no doubt that the property market is showing signs of life. Rising house prices don't necessarily benefit all that many people. Falling house prices can be very painful for lots of people.

It is quite bizarre that in a small country with well over 100,000 people in mortgage arrears and thousands more in negative equity, that there is so much excitement about house price rises in Dublin.

Have we the capacity as a nation to do it all to ourselves again in 10 or 15 years time? Sadly, I think we just might.

Sunday Indo Business