The cost of renting a home in the Republic could increase by as much as 25 per cent over the next two years because of a shortage of supply and the difficulties people have buying property, it has been warned.

The rate at which house prices have been climbing over the last two years coupled with more stringent lending rules from the Central Bank and sluggish wage growth have led to more people renting for longer, according to new figures published by Savills Ireland.

The research also indicates that less than two per cent of rental properties in the Republic are available for rent with low vacancy rates driving the cost of accommodation in the private sector higher.

The cost of renting a home countrywide jumped by almost 10 per cent in the 12 months to the end of July with rents in Dublin reaching record levels. The average monthly cost of renting in Dublin at the end of the second quarter of the year was €113 higher than 12 months earlier.

Rented accommodation

Using CSO data, the new report shows that the Private Rented Sector (PRS) has expanded strongly in the capital in recent years with almost one in four people now living in rented accommodation.

All told 328,700 people are now relying on the private rented sector for a home, a 61.3 per cent increase since the first quarter of 2011.

The stock of private rented properties in Dublin has gone up by 43,000 over the same period while outside the capital there has been an increase of 24,128, figures which would appear to contradict claims by some estate agents and business associations that landlords are fleeing the market.

The vacancy rate in the sector across the State is now just 1.45 per cent and Savills said there would have to be a 300 per cent increase in vacant units needed before rents will stabilise.

“With rents back to boom-time levels, income yields on residential property are much more attractive than the returns that are available to investors who leave their money in the bank or buy a bond,” said Savills research director Dr John McCartney said. “On top of this, investors are generating wealth from capital appreciation – it’s a no-brainer for people with the cash.”

He said house price inflation, sluggish wage growth, weakened household balance sheets and tight mortgage lending “have conspired to drive people who would otherwise have been owner-occupiers into the rented market. At the same time social housing tenants are increasingly being housed in private rented accommodation. This has driven a huge increase in rental demand.”

Savills has calculated the long-term mathematical relationship between vacancy rates and rental growth. This is then used to forecast residential rents into the future. Based on three alternative vacancy rate scenarios the model predicts compound rental growth of between 22 per cent and 26 per cent between now and the end of 2018.