There is no bubble in house prices - but they are set to rise strongly for another three years, a leading think tank said.

Property prices are still undervalued despite the surges seen this year, the Economic and Social Research Institute said. It estimates that prices are set to increase by 6.5pc a year up to 2017. This means prices may surge by close to 20pc over the three-year period.

Expand Close Houses are selling for more than the bank threshold. PA / Facebook

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Whatsapp Houses are selling for more than the bank threshold.

The ESRI has concluded that property will continue to increase in value until there is a huge rise in building output.

But it says we do not have a housing bubble, simply a shortage of supply in certain areas.

The most recent figures from the Central Statistics Office show prices jumping by 12.5pc across the State in June when compared with a year earlier.

In Dublin, prices were up 24.4pc on an annualised basis - twice the rate of increase in the rest of the country.

Undervaluation

Separate figures from the ESRI last week found that 45,000 people had been lifted out of negative equity by sharply rising prices. But in the latest academic paper from the ESRI, Kieran McQuinn says prices are still undervalued. He estimates that the undervaluation could be anywhere between 12pc and 27pc, depending on the results of different economic models.

The figures are not broken down between Dublin and the rest of the country.

Houses nationally are now selling for €188,000, up by €21,000 in the past year, calculations based on CSO figures indicate. Another 20pc rise would see the average house selling for €240,000.

"These results indicate that any reference to the recent increases in house prices as constituting a housing bubble in the Irish market is, at present, misplaced," the ESRI study said.

Dr McQuinn says there would need to be evidence of irrational exuberance on the part of property buyers for a bubble to be present.

Prices would also need to be rising at a level not warranted by factors such as income levels, interest rates, unemployment rates, population changes and housing supply.

However, if there is "unconstrained" lending by banks it will lead to a bubble. But there is actually a shortage of mortgage finance at the moment.

In the study, entitled 'Bubble, Bubble, Toil and Trouble? An Assessment of the Current State of the Irish Housing Market', the economist says prices fell too far between 2007 and 2013. That will now be partly corrected.

"Our forecast model suggests that Irish house prices will grow in real terms by an annual average of 6.5pc from December 2013 to 2017," the research says.

Dr McQuinn said the price falls were so severe in the seven years up to now that they are now undervalued, when looked at in terms of disposable income of householders.

The increases that we are now seeing are likely to be highest in Dublin, where there is the greatest shortages.

Finance Minister Michael Noonan (below) has repeatedly dismissed claims there is a bubble in property prices and even said he wants them to rise.

Meanwhile, the head of the Construction Industry Federation also denied that there is a property bubble. Tom Parlon said prices have only risen marginally compared with the collapse over the last seven years. He said builders are finding it tough to get funds.

Mr Parlon said: "The third force of finance is a major issue and we did have a lot of talk about the Strategic Investment Fund. There is over €6bn in it, there's certainly scope there for that to provide some of the matching funding because, as I said before, it appears to be a no-brainer."

Irish Independent