A large reduction is the scale of house building is forecast by the Economic and Social Research Institute in its latest quarterly economic commentary.
The institute also says the Exchequer stands to lose a large amount of tax revenue as a result.
It says that houses are currently overvalued by 15% and warns that investors may pull out of the market now that house price growth has slowed.
The ESRI also estimates that a quarter of all new houses built over the past five years were for second dwellings and holiday homes. It says many of these second dwellings may have been speculative investments encouraged by the prospect of rising house prices.
Now that house price growth is slowing the Institute expects that investors, as well as others buying second dwellings, will scale back their activity, resulting in a large reduction in the scale of house building.
The ESRI also says the Irish economy has been losing competitiveness and that it is now imperative to halt this trend. But despite the expected slowdown in housing investment, the institute still expects the economy to grow by 5.4% this year.
That is because it thinks Irish consumers are set to increase spending on consumer goods and services by a massive €9.4 billion as their SSIA savings accounts mature.
The should ensure an additional 78,000 new jobs this year as well as net inward migration of 55,000 people.
The ESRI says, however, that the economy will slow down in 2008 with a growth rate of less than 4% expected and employment growth more than halved to 34,000. The result, according to the report, will be a combination of fewer immigrants, higher unemployment, and slower growth in the labour force next year.
The report says that inflation will average 4.6% in 2006, but ease back to 2.6% next year on foot of weaker economic growth.
