HOUSE PRICES fell by 3.5 per cent in the final quarter of last year, and are down 38 per cent since prices peaked at the end of 2006, according to the latest house price index from Permanent TSB and the Economic and Social Research Institute (ESRI).

The rate of decline in average house prices in Ireland accelerated in the fourth quarter. However, overall the rate of decline for 2010 was significantly less than in 2009. House prices fell by 10.8 per cent in 2010 compared to a drop of 18.5 per cent in 2009.

While the index indicates property prices are now back to 2002 levels, estate agents Savills says in some areas houses are transacting at 2000 price levels.

The average price for a house nationally in the fourth quarter of 2010 was €191,776, as against €215,086 for the same three-month period a year earlier and €311,078 at the peak of the boom.

Responding to the figures, the Professional Insurance Brokers Association said it was the absence of a normal banking system that was the biggest impediment to a recovery in the property market.

“There is a demand for mortgages which is not being met since lenders tightened their lending criteria and started cherrypicking in a serious way,” said Rachel Doyle, director of the association’s mortgage services, in a statement.

Ms Doyle added the falls in house prices to date had made it “virtually as cheap to buy a house as rent one”, but that would-be first-time buyers and people wishing to trade up or relocate were being hampered by the squeeze on mortgage lending.

The Permanent TSB/ESRI index showed prices in Dublin fell by 15.1 per cent for the year as a whole.

The average price for a house in the capital was €237,480 in the fourth quarter compared to €238,986 in the preceding three-month period.

House prices outside of Dublin were down by 8.1 per cent for the year as a whole. The average price for a house outside of the capital was €174,570 in the final quarter of the year, as against €179,721 three months earlier.

Permanent TSB general manager Niall O’Grady said it was unlikely the housing market would bounce back this year.

“With low transaction volumes, continuing price declines and a sluggish economy, the outlook is for a very subdued property and mortgage market in 2011.”

The index is based on the agreed sale price and is calculated using data from mortgage drawdowns.