The latest Daft report is out today, with a commentary by Charlie Larkin of Trinity College and the Swan Group. The report covers the rental market up to the end of October. The main finding is that rents are at their lowest level since the Daft index starts in 2002. Some other “things we didn’t know before”:
- Dublin appears to be adjusting faster in the rental market, as well as the sales market. Earlier this year, a clear trend emerged, with asking prices have fallen more in Dublin than other parts of the country. For the past two quarters, rents have fallen in Dublin more than anywhere else in the country. As a result, average rents are almost 25% lower than the peak in the capital, compared to 18% in other cities and 20% elsewhere in the country.
- Whether it’s the bigger fall in rents or not, urban areas have seen a fall in the stock available for rent at any one time. The total stock for rent nationwide has fallen about 10% from its July peak. This is driven by Dublin, where stock has fallen 16%, and to a lesser extent rental markets in other cities, which are smaller but where the fall has been slightly larger in percentage terms.
- The fall in rents means that yields on residential property remain low – at 3.4% on average. Yields are highest in Dublin city centre (4.6% on average) and West Dublin (4.2%).
Using CSO data on rents pre-2002, it’s possible to go back further, rents are now at levels last seen almost 10 years ago in 2000. The graph below shows long-term rents (and house prices), from 1997 on. I think the house prices comparison is a very relevant one. Rents are back at 2000 levels and only about 20% above what they were at the start of 1997. Meanwhile house prices are back at early 2004 levels (or possibly 2003, if one applies a discount from asking prices) and are still three times – or 200% – above what they were at the start of 1997.
The reason this becomes important is not for buyers or renters, per se. Rather it’s important for each and everyone of us as Irish taxpayers. NAMA’s business plan sets out assumptions in relation to the property market. The key one – the one on which get-out-and-break-even aspirations in 2020 are based – is that yields return to healthy levels compared with historical levels in Ireland (and experience elsewhere in Europe).
The maths now look more and more challenging for NAMA. For yields to return to healthy levels, one of two things must happen. Either house prices would have to fall significantly faster than rents or else rents will have to rise at boom-like rates over the coming 10 years. The Government has effectively ruled out the former, by announcing an estimate of long-term economic value that’s above current market values. This means that the Government expects significant rental increases each year, every year from next year on.
The problem with this is that the reason rents are falling now is, by this stage, outside of the Government’s control, namely overconstruction of properties during the boom years. Squaring that circle is the unenviable task of NAMA over the coming months and years. If I were to recommend a course of action, for what it’s worth, I would recommend that instead of sticking to now out-of-date assumptions about the future direction of property prices, those valuing the NAMA loans’ collateral do so with all the sobriety of a calculating investor. If this means paying significantly below current market values, then so be it.
In the meantime, though, tenants can enjoy much-welcome savings when they sit down to prepare their budgets for 2010. The typical Dublin tenant can expect to save almost €4,000 on their rents over the course of a year compared to what they paid in 2008. Elsewhere, tenants could typically expect to save about €2,000. These reductions, along with similar reductions in the cost of clothes, furniture and household equipment – and more recently food – will be particularly welcome as people expect more reductions in their disposable income as well as increased healthcare costs. Trends across a range of prices from 2003 are shown below. (Long-standing readers of the blog will not be surprised by the trends in clothes and household goods.)