This phenomenal rate of growth has given rise to heated bar room debate, with many pundits predicting that it cannot last. However, the facts beg to differ. House prices ultimately depend on the fundamentals of supply and demand.

And all the recent evidence indicates that, while housing demand will continue to be strong, supply will be constrained.

In essence, this is a recipe for further house price growth.

Growing population Looking firstly at the demand for housing, a wide ranging report published by the Central Statistics Office last week, 'Measuring Ireland's Progress', provides some interesting insights. It shows that Ireland's population has grown by 14% over the last 10 years, compared to an EU average of 2.5%.

This trend will continue for several reasons. Firstly, we have the highest fertility rate in the EU. Secondly our life expectancy is increasing rapidly. Thirdly, we now have strong immigration, with 53,400 people coming to Ireland last year alone.

The sheer weight of numbers, then, is underpinning demand and driving up prices.

Smaller households The second factor pushing up prices is falling household sizes.

These have declined by over 9% in the last 10 years, and continue to slide as a result of social trends such as separation and divorce. As household sizes get smaller, simple arithmetic suggests that more housing units will be required to accommodate a given population.

It's the economy A third factor is the robust economy. Employment has doubled to two million since the early 1990s, while unemployment has fallen from over 17% to just 4.2%. Strong employment growth has led to higher wages, with average industrial earnings increasing by around 40% in real terms since 1987.

All of this is set to continue. The ESRI is forecasting GDP growth of 4.8% for this year and 5.1% for 2007 which should underpin continued jobs growth. Minimum pay increases of 10% over 27 months promised by the new national partnership agreement, not to mention additional payments for public sector workers under Benchmarking II, will ensure further earnings growth. On average we will become more wealthy for the foreseeable future. And as estate agents know, when people have more money, they buy more houses.

Cheap loans Cheap finance is a fourth factor supporting demand. Sure, interest rates have risen. But there is an emerging view that future monetary tightening may not be as drastic as many commentators have suggested.

Over the past 18 months oil prices have escalated, driving up inflation and putting pressure on the European Central Bank to increase rates. However, oil price inflation is set to moderate. Firstly, base effects which will kick in on the anniversary of last August's oil price surge will bring down the energy component of inflation. Secondly, the weakening US dollar will continue to offset oil price hikes in the Eurozone.

Given these factors, and the tentative nature of Europe's economic recovery, the ECB may well adopt a less hawkish monetary policy. But, even if rates were to rise more sharply, house buyers are unlikely to be frightened off. After all, rates have ticked up by 75 basis points since December, but this has had no dampening effect on the market whatsoever. Indeed, latest ESRI figures show that property inflation has actually accelerated threefold since this time last year.

The insensitivity of house buyers to interest rates reflects two factors. Firstly, they have already priced future rate hikes into their behaviour. Secondly, although there is no doubt some people have severe affordability issues, evidence from a recent IIB/ERSI survey indicates that most people are not overburdened with debt and have the money to comfortably meet higher repayments if necessary.

When we add these factors to the maturing of SSIAs this year, my view is that the demand for housing is certain to remain strong over the medium term.

Shortfall in supply While the demand side factors outlined above are now well established, there are important new developments on the supply side. For years, economists confidently predicted that the house building industry would be unable to step up its output rapidly enough to meet the huge excess demand.

Firstly, they pointed to labour constraints . . . with the best will in the world, there are only so many builders, architects and engineers available to build the required houses. Furthermore, they highlighted issues around planning and the availability of sites.

However, these predictions have been routinely confounded by housing completion statistics. Government figures show that annual build rates have increased by 140% over the last decade, and supply has accelerated every year since 1994. But now, belatedly, economists' predictions about supply constraints appear to be coming true.

After a period of growth, the number of housing commencements notified to the Department of the Environment fell between 2004 and 2005. In Dublin, it fell sharply . . .

by 12.25%. Furthermore, according to a recent report by construction consultants Davis Langton, this trend has continued into 2006 with first-quarter housing starts for this year also significantly down. Commencement notices provide a fairly reliable indication of building activity six to 12 months into the future, and so this evidence suggests that housing completions in 2006 may fall for the first time in 12 years.

Looking further ahead, the picture is no more promising.

The CSO's latest statistics on planning permissions, which predict building activity around three years into the future, also show a decline. Hot off the press last week, these figures reveal that the number of houses getting the green light fell by 13% year on year in the first quarter of 2006. Permissions for apartments are also down. Therefore, the fifth and final reason why house prices will continue to rise is that supply constraints are finally beginning to bite.

The last decade has seen record house price increases. The demand factors that underpinned this phenomenon are still there. The key difference today is that the safety valve of rapidly expanding supply appears to be closing. And in any market, when we get huge demand chasing scarce supply, prices can only go up.

Bookmaker Paddy Power is offering odds of four to one that house price inflation will be less than 10% this year. If you fancy a punt, my advice is to stick to the World Cup.

Dr John McCartney is an economist and property analyst with Lisney Research