Property investment in Dublin has become prohibitive with rental yields less than the rate of inflation, a new study on the property market suggests.

"Since April 2001 house prices are up 52 per cent on average nationwide but rents are down 2 per cent," Davy economist Rossa White said yesterday.

Comparing the cost of acquiring a house in Dublin - inclusive of stamp duty and legal fees - with the net rents, Davy research suggests that net rental yields - rents that are adjusted for letting costs - range from 1.4 per cent in Sandymount to 3.2 per cent in the Docklands area of the city.

"Spiralling prices have sent yields well below the rate of consumer price inflation in many areas: gross, never mind net, yields have typically dropped to 2 per cent," Mr White said.

He said that arguments used by estate agents to justify buying to let - on the basis of a possible future capital gain - were "fundamentally unsound".

Sale-agreed house prices are running "at least 20 per cent" ahead of Advised Minimum Value (AMV), according to Davy's analysis.

Estimates for rental yields in Davy's calculations - which were based on AMVs rather than agreed prices to measure rental yields - were, if anything, overstating rental yields, Mr White said.

Rental yields of 1.5 per cent in the Dublin area compare with a 3.5 per cent yield on long-term gilts and a 7 per cent return on a "similarly risky" investment in the ISEQ index.

The Davy report predicts yields will fall further. "If prices continue to rise at 20 per cent for the next three years and rents grow by an optimistic 5 per cent a year, the price of all of these houses will be 100 times the annual rent earned by 2009," it said.

Mr White said investors were mistakenly assuming that investments in property that was located close to the city centre were low risk as a result of land scarcity.

"The same argument was made in Japan in the late 1980s, as property soared in value. Residential land prices in Tokyo are down almost 60 per cent since March 1990," he said.

Davy's study sample was of two-, three- and four-bed houses and apartments in Clontarf, Ballsbridge, Drumcondra, Sandymount and Terenure.