Property prices plunged 7.3 per cent in 2007, but soaring rents will bring buyers back to the housing market and stabilise prices later this year, according to one of the Republic's biggest mortgage lenders. Laura Slatteryreports.

New figures from the Permanent TSB and Economic and Social Research Institute (ESRI) show that buyers paid €23,000 less for an average property last December than they did 12 months earlier as the market "finally came off the boil". Prices are now back where they were at the start of 2006.

National prices are predicted to drop a further 5 per cent in 2008, but the slide in property values is all expected to take place over the next few months.

Purchase prices will start increasing again in mid-2008 as tenants paying high rents reach the tipping point where it becomes as affordable, or almost as affordable, to repay a mortgage as it does to spend "dead money" on rent, said Permanent TSB's head of marketing Niall O'Grady.

Rents are now growing at their fastest rate since October 2001, climbing at an annual rate of 12.3 per cent, Central Statistics Office (CSO) data shows.

The buoyant rents, combined with possible interest rate cuts, will also boost yields for buy-to-let investors, who will flock back to the market, thus halting the downturn in prices and giving first-time buyers the confidence to buy, he said.

"Ireland is traditionally a nation of homeowners . . . so we do expect demand to come back into the market. It is just a question of when."

Demand for properties will also be propped up by the demographic profile of the Republic's population, which shows that the key house-buying 20-40-year-old age group is still expanding. The ESRI's forecast that net incomes will grow 6 per cent this year will also support the property market, Mr O'Grady said.

But he added that conditions were much tougher than they had been during the "decade of phenomenal growth" and said the performance of the housing market was increasingly dependent on stability in the global economy and European Central Bank interest rate decisions.

When buyers do return, they will be competing for a tighter supply of new homes. Builders are expected to complete around 50,000 houses and apartments this year, down from 78,000 new homes in 2007 and a peak of 93,400 in 2006.

Property prices fell 7 per cent in Dublin last year and 6.4 per cent outside the capital, the house price index indicates.

But there were strong regional differences, with prices in the midlands down 8.2 per cent in the second half of 2007 compared with the second half of 2006, while prices in the Border counties fell just 4.1 per cent.

New house prices fell just 4.1 per cent in 2007, as developers offered incentives such as a high-standard finish, white goods and cars to first-time buyers in order to shore up prices.

MAIN POINTS

• House prices fell 7.3 per cent in 2007 and are predicted to drop 5 per cent in 2008, with fewer homes built.

• Properties in the midlands fell the most in value and are down 8.2 per cent on 2006.

• Second-hand homes fell 9 per cent, but new house prices fell just 4.1 per cent, as developers included incentives.

• Rents are rising at their steepest pace since October 2001, climbing 12.3 per cent annually.