House prices could lose a quarter of their value from their February 2007 peak by the end of next year.

A report on the housing market released by analysts at Fitch Ratings found Irish house prices are likely to fall 10% this year and a further 5% next year.

Given the drops already experienced, Fitch said house prices could fall 22% from their peak level last year.

The report said the housing market in Ireland has recently seen a cooling down period, following more than a decade of rapid house price growth.

It said: “The trend of negative monthly declines in house prices is likely to continue, given the oversupply of houses in the market, stretched mortgage affordability and ongoing funding constraints for lenders.”

In a report released yesterday, the agency showed how it stress-tested investment-grade Irish Residential Mortgage-Backed Securities (RMBS) ratings against various hypothetical scenarios of declining house prices and increasing defaults, concluding that the majority of investment-grade RMBS can withstand significant stress.

“The recent house price correction in the Irish housing market has not resulted in any major deterioration in the performance of underlying mortgages in Irish RMBS,” said Gregg Kohansky, senior director and head of Europe Middle-East and Africa (EMEA) RMBS at Fitch.

“However, possible further declines in house prices would likely increase defaults and losses in these transactions.”

Fitch’s stress tests show the majority of the ratings are stable in all scenarios.

However, expected rating volatility is the highest in the “severe” scenario which takes into consideration a 30% future decline in house prices.

Fitch stress-tested the ratings of 31 tranches in seven Irish RMBS transactions, rated from 2000-2007 vintages.

The study covered Fitch-rated Irish conforming and non-conforming RMBS transactions with ratings outstanding as of yesterday.

The report, Ratings Stress Test: Impact of Irish Housing Market Downturn Scenarios on Irish RMBS Ratings, is the second in a series of stress-test reports looking at different European RMBS — the first of which covered British non-conforming RMBS.

The next report to be released will cover Spanish RMBS.

The agency has also published stress test reports for other asset classes including UK CMBS and UK Credit Card ABS.