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Dublin leads Irish residential market recovery

Dublin is leading the rapid rise in Ireland's house prices, with properties in the capital up by 22 percent in a year with the country as a whole trailing with rises of around 10.6, according to Ireland's Central Statistics Office.

While these rapid rises raise fears of a return of the runaway property market whose crash sent Ireland down the path to an international bailout, the increases are still well below their pre-crisis peak.


Aidan Crawley | Bloomberg | Getty Images

Read More Small business credit drought slows Ireland's recovery

The jump in prices can be attributed to "the recovery in the euro zone," John Ring, investment analyst at Knight Frank said in a phone interview. The recovery, he added, "has brought confidence back and spurred the long-term fundamentals of the market".

However, they remain well below their highest level. Despite the hefty year-on-year hike in Dublin, residential property prices in the capital are still 46.3 percent lower than at their highest level in 2007. The gap is more pronounced for apartments (53.4 percent lower) than for houses (at 44.4 percent below). The overall national index is 45.1 percent lower than its highest level in 2007.

Marian Finnegan, chief economist at Sherry FitzGerald – Ireland's largest property advisory firm- told CNBC by phone that the price increase in the capital is supply-led.

"The quantity of property available for sales has tightened", she said, as construction remains low and a number of households remain in negative equity following the financial crash.

Read More S&P upgrades Ireland's rating, growth forecast

The Irish economy has been growing from strength to strength recently having successfully exited its bailout program and returned to the market.

Consequently, confidence in the country's economy improved and credit ratings agencies upgraded their stance: Moody's upgraded its outlook for Ireland's debt to stable from "junk" in May, while in early June, Standard and Poor's graded the Irish economy A minus with "positive" outlook.

Price inflation should continue to be high for the remainder of the year and through 2015, Finnegan forecast as "the huge amount of pent-up demand", combined with the low stocks mean people are frustrated and "bid aggressively on the available stock".

"All the vacant stock has been absorded", explained Knight Frank's Ring, making the medium-term outlook for prices "very strong".

However, while high price inflation is set to stay for the next couple years, the capital's residential market is still "well off" from reaching pre-crisis levels. It will take "up to five years to get back to peak level", Finnegan concluded.

Read MoreIreland: Real recovery or all blarney?

Follow us on Twitter: @CNBCWorld

Correction:
This story has been updated to reflect that John Ring is an investment analyst at Knight Frank.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.