By Padraic Halpin
DUBLIN (Reuters) - Ireland proposed temporary controls on residential rents on Tuesday to cap annual increases initially in the country's two largest cities at 4 percent in a bid to bring "sensible" rates of inflation back to the market.
While Ireland was left with a surplus of houses after a 2008 property crash, supply has since failed to come anywhere close to matching demand in the fast-recovering economy, sending rents back above their peak in the "Celtic Tiger" years.
Average rents rose by 11.7 percent year-on-year in the third quarter, a survey showed last month, marking the fastest rate of annual inflation in over a decade with rents in some areas of Dublin now 10 percent above their 2007 peak.
"We're putting a bridle on the horse that has almost been out of control for the last two years in terms of rent increases," Housing Minister Simon Coveney told a news conference.
"We're trying to slow that down, manage it and bring a lot more predictability. This is a really tricky area to get the balance right."
Under the plan, Dublin and Cork city fall under the category of "rent pressure zones", or areas where annual rents have risen by 7 percent or more in four of the last six quarters. They will be the first areas where the three-year caps kick in.
To encourage supply, which Coveney said was beginning to gain momentum, new housing units and renovated vacant units are excluded with rents instead determined by the market rate.
The lack of supply and resulting price rises have been identified by the government as a risk to its attractiveness to foreign investment, particularly as it tries to win business from firms considering leaving Britain as a result of Brexit.
The proposals will impact Real Estate Investment Trusts (REITS) with exposure in the main residential markets, although Investec Ireland said its forecasts for rental inflation at Irish Residential Properties (IRES) (I:IRES) already assumed a level below the proposed limits.
Shares in IRES, the country's largest private landlord, were 1.7 percent lower at 1.17 euros at 1400 GMT.
Others said that after previous controls introduced last year limited rent reviews to every two years, large swathes of the market would remain below the market level.
"We see this as damaging to professional landlords operating in the Irish market, and will provide reduced incentives to growing lettable stock," Goodbody analyst Eamonn Hughes wrote in a note.