DUBLIN, Dec 13 (Reuters) - Ireland's government is set to propose temporary controls on residential rents on Tuesday that will cap annual increases in the country's two largest cities at a maximum of 4 percent, a government source familiar with the plan said.
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 "Celtic Tiger" peak this year.
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.
Under the plan, expected to be approved by Cabinet on Tuesday, Dublin and Cork would be designated as "rent pressure zones" where the caps would apply. The state body in charge of regulating the sector would judge if other areas should also fall under the category, state broadcaster RTE reported.
New housing units put on the rental market would be excluded from the new proposals, as would vacant units that come back on the housing market following renovation, RTE reported.
The proposals will impact Real Estate Investment Trusts (REITS) with exposure in the main residential markets, although economists at Investec Ireland said its forecasts for rental inflation at Irish Residential Properties (IRES) already assumed a level below the proposed limits.
Shares in IRES, the country's largest private landlord, were 2 percent lower at 1.17 euros at 1055 GMT.
Others said that after previous rent controls introduced last year limited rent reviews to every two years, large swathes of the market remain below the market level and that the new proposals will not aid supply.
"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. (Reporting by Padraic Halpin; Editing by Catherine Evans)