INCREASING MORTGAGE costs and fears about the economy wiped close to 10 per cent off house prices over the last year, the latest figures show.

According to the Permanent TSB/Economic and Social Research Institute house price index, residential property values tumbled by 9.5 per cent between May 2007 and May 2008.

Permanent TSB said yesterday the 12-month decline in house prices was deeper than the 9.2 per cent year-on-year fall recorded in April.

The average price paid for a house nationally was €275,176 in May, compared with €287,887 in December. Prices fell by 4.4 per cent in the first five months of the year. The index shows they dropped 1.2 per cent last month and 1.1 per cent in April.

Commenting on the results, Niall O'Grady, general manager, business strategy with Permanent TSB, said that the combination of higher mortgage rates and weakening confidence has increased uncertainty about the property market's immediate future.

"This has resulted in lower demand, thereby reducing transaction numbers and property prices," he said. Mr O'Grady said that the trend is likely to continue as the European Central Bank increases wholesale borrowing charges next week.

This will have a knock-on effect on the rates that banks charge mortgage customers, which are likely to increase as a result.

He said that banks have already increased their rates because the global credit crunch means it is already more expensive for them to raise money.

He pointed out that falling prices mean houses are becoming more affordable, but he said that buyers are holding their fire because they believe that costs will come down further.

Mr O'Grady confirmed a trend that other banks have seen, where people get loan approval, but do not draw down the cash because they are biding their time.

"It's a buyers' market out there at the moment, that's the reality. The market has not woken up to the fact that prices need to come down before people will start buying property."

However, Goodbody Stock- brokers' economist Deirdre Ryan said yesterday that sharp falls in the cost of new homes, which were down 1.7 per cent last month and 2 per cent in April, were due to developers cutting prices sharply earlier in the year.

She added that these cuts were now reflected in the index. "This 3.6 per cent fall in new house prices over the past two months has extended the annual rate of decline from 5.8 per cent in March to 8.3 per cent in May," she said.