Another way of presenting the potential Rental Yield of a property is in the form of a Price/Earnings ratio. This is a calculation borrowed from valuing company shares and is simply the price of a share (or property) divided by the earnings. In the case of a company, earnings are the profits of the company - in the case of a property, it would be the rent.

You can express lots of other investments in the same way.
e.g. a bank account paying 5% interest has a P/E of 20 (every €100 earns €5). In simple terms it means that it would take 20 years to earn the original cost of the share.

A so called "risk free asset" such as a gilt would have a p/e of maybe 30 (c.€3 return on every €100)

A big bank like AIB has a P/E of around 13/14, to reflect the increased risk of holding such an asset. (for every €100 you invest, you expect to get 7.x back). Interestingly with the recent collapse of bank shares, the P/E of Irish banks is now down to about 3.

A fast growing internet company would have a P/E possibly in the high single digits e.g. Google is 44 (for every €100 you invest, you expect to only get €2 in return, but you are hoping for high growth rates)

The E in Irish property is Rent and the P is Price. Rents are running at about 2/3% yield, meaning the P/E on Irish property is about equivalent to a dot com/high growth share, at approx. 40.

This isn't quite the same as for shares where earnings refers to profits. The rent that a property earns isn't all profit. However, for the sake of this calculation it is acceptable to use rent.

A P/E of 40 on property is unsustainable, as you can get a P/E of 20 in a simple savings account. So what would it take to return property to a P/E of say, 12 ? (equivalent to a large bluechip company with some growth prospects)

12 would mean an 8.3% yield, which is consistent with the yields investors were getting before the boom. This tells me that a P/E of 12 on property is in the right ballpark.

A property worth €500K with a yield of 3% (a P/E of 33), is generating about €15K in profit per annum, which again looks in the ballpark, if a little high even.
To get that property back to a P/E of 12 would mean either the rent has to increase to €41,500 or the price would fall to €181K.

That calculation implies that Irish property is exactly 63.8% overvalued.

Note that in other countries investors would say no to a yield of a mere 8.3%. Property requires work, it requires repairs, it must be kept occupied to earn anything. A yield of 10% would be the minimum acceptable to many investors. In Ireland we have been conditioned to expect and accept less.