A leading economist has revealed the sharpest construction slowdown in more than four years could see house prices return to growth by next summer.

Ulster Bank’s chief economist Pat McArdle also said that further decline was recorded in September and there had been a steady decline in the level of unemployment in the sector since the middle of the year.

Mr McArdle said just 60,000 houses are expected to be constructed next year, which is almost 20,000 behind the house-building peak of 2006 when 88,000 new homes were built.

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"House prices are a simple function of supply and demand," said Mr McArdle.

"When demand is reduced builders have two choices, they can keep on building and watch prices fall or they can cut back in production and keep prices constant. They’ve gone for the second one here."

He continued: "I wouldn’t be surprised to see house prices rising slightly in the second half of 2008."

Despite a PMI in September housing activity of 29.5, down from 31.4 in August, the index shows that confidence amongst construction firms is holding up. "The question is, 'in a year's time will you be doing more or less?'," he asked.

"The majority of them are saying they'll be doing more. This means that it's probably a conscious strategy that they are pursuing: they’re slashing output now so that in a year's time they will be able to expand again."

(JM)