Davy stockbrokers has added its voice to the siren calls that Dublin house prices are now fully detached from reality by claiming that prices are heading for 100 times their rental income.
According to research conducted by Davy economist Roassa White, house prices are up 52 per cent on average nationwide since April 2001. By contrast, rents are down 2 per cent. As a result, yields have been driven down to unprecedented depths.
"Something does not feel right" Mr White writes.
"A line frequently trotted out by estate agents is that 'buy-to-let investors are not worried about rental yield; they are in it for the long haul of capital appreciation'. That is fundamentally unsound investment advice," according to Mr White.
"In the long run, the value of any asset is dependent on the income it provides. In the property market, capital appreciation is theoretically a function of rental return."
The Irish property market has heated up significantly in recent months. In the Dublin market, prices are now rising at an annualised 20 per cent lick, up from only 3 per cent less than a year ago.
Mr White adds that persistently low rents refute the theory that supply shortages are leading to rocketing prices in "desirable areas" of Dublin. "If that was the case, residential rents would be rising rapidly, but they are not," he says.
"The proposition that scarcity of land close to the city-centre makes residential property a low-risk investment is not supported by evidence from other countries. Moreover, property is a risky asset, like equities, corporate bonds and commodities. Net yields of 1.5 per cent, which are commonplace in Dublin, look ridiculous compared with a risk-free rate of 3.5 per cent on ten-year gilts," according to Mr White.
"It is better to compare residential property to a similar risky asset like the ISEQ index, which has an earnings yield of 7 per cent. Not only that, but Irish listed companies' profits are growing three times as quickly as rents in Dublin" he adds.
"To us, this looks like boundless optimism," the report concludes.
The report warns that as supply in Dublin remains plentiful in the near term and rents remain under pressure, the fundamentals suggest that it will be an adjustment in prices, rather than rents, that will eventually bring valuations down to more realistic levels.