THOUSANDS of potential first-time housebuyers were last night told to rent rather than buy as prices are forecast to continue falling for the next two years.

Prices for starter homes typically bought by young couples will plunge by 10pc this year, and by between 5pc and 7pc next year, the ESRI says in a major new report published today.

Its housing economist David Duffy advised buyers that renting is a better option for now.

He said the continuing falls would deter purchasers, even if they could afford to buy.

But there may be fewer people who can afford a new home, as a run of tough budgets slashes household income, the ESRI says.

The forecast from the prestigious think-tank is likely to further depress the housing market.

In its main quarterly economic analysis, the institute says the next four Budgets could knock an average €7,000 off household income by 2015.

This 8pc drop is on top of a €9,000 cumulative reduction since 2008.

The ESRI believes the budget austerity measures will stabilise the public finances and that national debt will peak at affordable levels.

But the eurozone crisis will hurt economic growth and make the budget targets more difficult to achieve.

Among the conclusions in the reports are:

- House prices are likely to fall by 55pc from the peak before they stabilise.

- House building will decline in 2012, with little more than 10,000 units completed.

- Personal spending will fall again next year, for the fifth year in a row.

- Economic growth of just under 1pc will be less than the Government hopes. The ESRI warns there should be no further cutbacks on top of those planned, even if targets are missed because of lower growth.

"The best hope, both for meeting the targets and employment, is for growth to resume. In an unfavourable external environment, this means pushing very hard on the competitiveness front," the ESRI says.

The housing analysis finds that, if house prices stabilise next year, potential first-time buyers would be better off going ahead with a purchase.

Dr Duffy said that if house prices decline by another 13pc, then renting would be a better option.

If house prices fall by another 4pc then there will be little difference in the cost to a family between renting and buying.

Dr Duffy believes "there is still significant adjustment to take place in house prices".

This year alone the price of the average property in the State has fallen by 15pc to take it down to around €170,000.

Rents rose slightly in the past few months for the first time since 2008, but are generally stable at the moment.

The research takes account of the fact that mortgage interest tax relief is due to be radically reduced for those who do not buy their first house by the end of this year.

The tax relief is due to drop from a maximum of €416 a month for a couple who buy before the end of the year to a maximum of €75 a month for couples buying from the start of next year.

Potential house buyers have also been hit by the reluctance of banks to fund mortgages.

Just 3,600 mortgages were issued during the summer, the lowest lending level since banks first started pooling information on the number of home loans they issue.

The quarterly economic report says there is little scope for further cuts in capital spending, so future adjustments will come mainly from tax rises and charges for services -- known as "stealth taxes."

Such a strategy would cost an average of €1,850 per year for each household from now to 2014, and €1,450 in 2015.

"The adjustment may be made by cutting employment directly as government services are reduced, but this is still reflected in cuts in disposable income," the report says.

The ESRI warns against bigger tax rises if the economy grows more slowly than expected, making deficits bigger as a share of the economy. "In the face of a less favourable international climate, the danger is the potential downward spiral in the economy if the targets are not met," it says.

Irish Independent