House prices fell 2.6 per cent in the first half of 2007, with prices falling most sharply in Dublin's commuter counties, according to the latest figures. Average national prices paid for property fell 0.5 per cent in June, which was the fourth consecutive month of decline in the market.

The average price tag for a property in June was €302,605, down €8,000 on the €310,632 average price paid last December, the house price index from Permanent TSB and the Economic and Social Research Institute (ESRI) shows.

House prices are still up 0.9 per cent over a 12-month period, but this annual rate looks set to fall into negative territory in the coming months.

Permanent TSB chief executive Denis Casey described the price falls as "a pretty modest decline", while Niall O'Grady, Permanent TSB's head of marketing, said the property market was "taking a breather" after 10 years of "breakneck speed" and exceptional growth.

"The future will continue to be influenced by interest rate changes and local sentiment. However, on the whole, the market remains solid," Mr O'Grady said.

Dublin house prices fell 1.3 per cent in June to an average of €418,905, while house prices outside the capital fell 0.9 per cent to an average of €257,945.

Over the first six months of 2007, prices fell by 2 per cent in Dublin and by 3.2 per cent outside Dublin. But Dublin prices are still 4.1 per cent higher than they were in June 2006.

In the commuter counties of Louth, Meath, Kildare and Wicklow, house prices fell 0.7 per cent in June and have dropped by 3.9 per cent so far in 2007. The average price tag of a property in these counties is €330,712, down from €344,186 last December.

Prices for first-time buyers are falling faster than they are for second-time buyers, according to the index. Mr O'Grady attributed this to a supply of properties aimed at first-time buyers coming on stream at the start of the year. The extra supply meant there was better value for first-time buyers.

House completions are forecast to drop from 93,000 last year to 75,000 this year and 65,000 in 2008, and the smaller number of new properties could result in "more robust" prices for first-time buyers, according to Mr O'Grady.

Mr Casey said that while people who bought houses at the end of last year had seen the value of their properties fall - leaving them in negative equity if they took out a 100 per cent mortgage - houses were not "trading assets" or "short-term punts", he said.

"People buy houses to live in, they do not buy them to sell in six months' or nine months' time. My view is that you are always better off repaying a mortgage than repaying dead money in rent."

Higher interest rates have meant first-time buyers have been unable to borrow enough to afford their first home, while investors have had to charge higher rents to cover the higher mortgage repayments.

New lending volumes are down 18 per cent at Permanent TSB in the first six months, while AIB said last week that its pipeline of mortgage applications had dropped 25 per cent.

Permanent TSB said it expected house prices to remain flat for the next 12-18 months, while the ESRI said in its last quarterly economic commentary that it expects average house prices to fall by 3 per cent in 2007. House prices across the Republic have increased 300 per cent since 1996, while in Dublin the rate of growth has been almost 400 per cent.

This is only the second time since the index began in 1996 that house prices have fallen over a six-month period. On the previous occasion, in the second half of 2001, the economic effects of September 11th and an exodus of investors from the market due to tax changes were the cause of a modest 0.4 per cent decline.