Reduced activity in the residential sales market, attributed to purchasers adopting a "wait and see" approach and investors being forced to look elsewhere, has had a significant negative impact on the private rented sector. Rents have risen by 24 per cent in the last year making it now cheaper to pay a mortgage than to pay rent, according to a new Gunne report published today.

Measures are required immediately to increase the overall supply of rental accommodation, warned Eunan O'Carroll, managing director of Gunne Residential. He predicted an annual increase in rents of at least 13 per cent based on the current continuing imbalance in supply and demand for rented accommodation.

Average rent for a typical two-bedroom apartment in Dublin city centre, where demand is greatest, is £1,200. "With rental levels increasing at an annual rate of over 20 per cent, people are increasingly trying to purchase property since it is now often the only way to be assured of accommodation given that rents and mortgage repayments have reached the same level," said the report, which was published in association with Hibernian.

The report recommended an urgent reform of government policy for the private rented sector, an immediate restoration of mortgage interest relief to attract investors back to the market and the restoration of viable levels of stamp duty.

Forecasts for future demand for rental properties are high so measures are needed to encourage the private investor back into the market.

"The government would do well to better understand the realities of the market," says O'Carroll. Meanwhile a more realistic residential sales property market has emerged since the beginning of 2001. "We have begun to see and will continue to see a more realistic residential property market in Ireland.

"While the pace of inflation has moderated substantially, fears of a significant reduction in house prices have proven to be unfounded to date. Reduction in the asking price of properties is representative of the fact that prices are being adjusted to suit market conditions," commented O'Carroll.

Good news for purchasers is that house price inflation is slowing. Growth of 5.1 per cent was recorded for the Dublin second-hand market in the first half of the year - down from 15.9 per cent in the same period last year - while the volume of properties coming on to the market increased by 27 per cent.

However, houses in the Dublin area remain unaffordable for many people, resulting in increasing numbers of people buying in counties Kildare, Meath and Wicklow.

The report also found that tighter policies being adopted by financial institutions and the current difficulties in securing bridging finance have had an impact on the speed of sales.

"The reductions in the volume of transactions in the £250,000 (317,434) and under category during the first six months of 2001 reflects the reduction in the number of people trading-up due to increased transaction costs after government intervention in the market," said the report.