The IAVI is predicting a soft landing for the residential market in 2007, writes Arthur Beesley, Senior Business Correspondent

The body that represents the property professions has predicted that residential capital values will increase by a "modest" 4-5 per cent this year after a marked slowdown in the second half of 2006.

In its annual property survey, published this week, the Irish Auctioneers' and Valuers' Institute (IAVI), said 2006 was a year of contrasting fortunes in the market. Dublin auction prices climbed to record levels in the first half of the year but 82 per cent of houses were withdrawn at auction in the second half.

"2006 was an amazing year for residential property, with unprecedented growth of as much as 25 per cent in the upper end of the Dublin auction market in quarter one," said IAVI chief Alan Cooke.

Such growth was followed by "effective stagnation in the autumn, with widespread withdrawals at auction, as a consequence of overly optimistic price expectation on the part of vendors".

Another factor was uncertainty about stamp duty levels in the run-up to the Budget.

"Outside Dublin, this contrast was present in most areas, but was not so drastically demonstrated," Cooke said.

The value of new detached homes in Dublin grew by about 10 per cent while the value of comparable homes in the "rest of Leinster" category increased by 12.8 per cent, the report said.

"Sites for development are as scarce as hens' teeth in Dublin and grew by 10-17 per cent last year despite tougher lending policies at the bigger banks. Reflecting the remarkable growth in new household formation, the price of sites for apartments and new houses outside of Dublin rose by an average of 13-16 per cent."

The growth value of new houses in Munster eased to 9.2-10.9 per cent and values in Connacht were "generally ahead" of 2005 levels, rising by 7.7-9.4 per cent.

The IAVI said an 11 per cent increase in three and four-bed second-hand homes in Dublin was down on the increase seen in 2005.

Homes in the "rest of Leinster" category performed best in the second-hand market. The value of detached homes in that region grew 9.7 per cent and three-bed semi-detached grew 12.6 per cent, increases that were "slightly" ahead of those in 2005.

Price inflation was more modest in the apartment market, with the average cost of new apartments rising 8.5-8.9 per cent in Dublin and second-hand units rising 7.7-8.4 per cent.

"Investors should note the double-digit (10.2-10.4 per cent) increase in two-bed apartment prices in the "rest of Leinster", which could reflect changing preferences among new buyers looking for a foothold in the commuter belt."

The IAVI said its members reported "very strong demand" for traditional cottage dwellings and period houses in rural areas.

"Inflation in rural residential property averaged 10 per cent in greater Leinster, clocking in at a more modest 7.5-8 per cent in Munster."

With commercial property performing strongly in 2006, the IAVI predicts 5 per cent growth in rents and a further modest hardening of yields.

The body reported an acceleration in rental growth last year, with rent increases doubling to 6.3 per cent in Dublin and doubling to 6.2 per cent in Munster. "Elsewhere, rental growth was around 3 per cent but still stronger than in 2005."

Professional investors in the retail sector enjoyed "bumper aggregate returns", the IAVI said.

"In a market that is decidedly segmented, yields again dropped, pushing up property values and allowing huge capital gains to be crystallised."

Office rents in Dublin grew strongly but office rents outside the capital flattened out, with only modest growth seen in some categories. "The reported yields on provincial office property continue to harden, suggesting that investor perceptions of such units remains strongly favourable in the medium-term."

Capital values in the pub market took a hit following the introduction of random breath-testing and a tougher penalty points system. Pubs in greater Leinster lost 2.3 per cent of their value while pubs in outlying areas lost 8.7 per cent.

In the farmland market, the IAVI said that the appetite for property continues to grow in spite of pessimism about the long-term outlook for the farming sector.

The price per acre of non-residential land reached a sum of €13,000-€21,000, depending on quality and location.