Standard and Poor’s the Global ratings agency has said that Irish house prices will recover and that it saw no sign of a new property bubble emerging.

It has forecast that Irish house prices to increase by 4pc this year, with a shortage of supply in urban areas exerting upward pressure on prices.

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However, the ratings agency said it doesn’t expect the housing market revival to stay as strong beyond 2014, due to tight bank lending conditions and high mortgage arrears.

It expects home prices to rise by 2pc in 2015 and by 3pc in 2016.

Noting the housing market in Dublin is racing ahead of the rest of the country, S&P said: “prices are now 26pc higher than their low point in August 2012, compared with just a 3.2pc rise in the rest of the country from their low point in March 2013”.

The agency said home prices for the country as a whole are still 45.1pc lower than at their boom-time peak in September 2007.

The most recent data from the Central Statistics Office shows house prices increased 10.6pc year on year in May on a national basis, after gaining 6pc in December 2013. However, the upward trend was led by Dublin, where prices climbed 22pc over the same period. Outside Dublin, residential property prices are recovering only sluggishly, with annual prices growth reaching 1.8pc in May.

S&P said the Irish economy will benefit this year from the improving external demand from its main trading partners, the US and the UK.

“This recovery may widen to domestic demand and, notably, to investment from next year, driven by global demand cycle. As a result, we forecast that unemployment will drop significantly to 9.7pc on average in 2016”.