Is the Irish property market a bubble? It is not now but it will definitely become one. By Ireland I mean Dublin. Today we were told that Dublin property prices were up over 12% on the year. This is the second highest annual rise ever recorded. So we are in the bubble territory and more depressingly these prices are being achieved without a huge amount of leverage in the system.

Once leverage returns – and it will – the second major housing bubble in fifteen years will take hold. The consequences will be traumatic, but it might take a few years for any crash to materialize.

Bubbles occur when there are the conditions for a six-stage property price cycle. The first stage is where we are now. This is called displacement. Such a stage happens when something fundamental happens, such as a property supply problem. This is real and it causes prices to rise based on too much demand and not enough supply. Prices jump and this attracts more people and investors into the market.

The second stage is called gearing. This is when the banks come in and add leverage to the investors and borrowers. The banks drive up prices and this process allows them to believe that the assets are rising and therefore the collateral on their balance sheets is getting stronger; it’s not, it’s getting weaker! But this gearing stage drives prices up and of course the banks outfox the regulators as they always do in search of new business.

The third stage is the euphoria stage. People feel rich and feel very secure about doubling up. Rents are going up so there is more than enough cash around to make legitimate the new valuations. The memory of the last bust fades and punters think this time it is different.

The fourth phase is the mania phase where everyone wants to get into the market. Houses are bought off plans and there is a general sense that things can only get better. Prices skyrocket.

The fifth stage is distress – this is when the smart investors get out. Prices are still rising but smart people are cashing in. The people who buy here are going bankrupt just when they think they are getting rich.

The final stage is what we call shut door panic. This is when everyone runs for the door to get out of the market but there are no buyers and prices collapse.

The key to understanding the bubble is spotting it early. I believe with the latest figures we are at the beginning of the process.