Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Spotting the swallows – Ireland’s rental market in 2010

Economic predictions are in some sense a win-zero game. If the prediction goes right, off you go, ready to be fêted as the latest “one who got it right”, in the style of Nouriel Roubini, aka Dr. Doom, following his now all-too-obvious prediction of a global financial and economic collapse. If it goes wrong, you whistle, brush it under the carpet – ready to dig it up in case it ultimately comes good of course – and if anyone ever mentions it, you blame some unknown factor which leapt out when you weren’t looking.

With little downside, then, I thought it was worth dabbling in such black arts at the turn of the year – making a dozen predictions for 2010. One was on rents – I predicted a change in rents of a further 10% fall this year (compared to a fall of 16% in 2009 and a rise of 4.2% on average between 2000 and 2007). However, in a line, it’s very hard to get across some of the subtleties included in that figure. With the 2009 in review Daft.ie Rental Report not out until mid-February, we’ve a bit of time to discuss what might happen this year in terms of rents, free from the constraints of the data.

First, a quick summary of what’s happened the rental market over the last few years. Rents rose from mid-2004 – actually from the exact month we opened up our labour markets to the new EU member states in May that year – until early 2008. Since then, they have fallen almost 25% in Dublin and about 20% elsewhere in the country. The principal reason rents have been falling so fast is the explosion of properties available to rent. In 2007, an average of 6,000 properties were available to rent at any given time. In 2008, it was 14,000 – in 2009, it was 22,000. A glut of supply at any time will push rents lower, but when demand is so weak – with falling incomes and those in rented accommodation by definition more footloose and therefore driving net emigration – the obvious consequence was rapidly falling rents.

In the last Daft rental report, though, published in mid-November, there was some evidence that these pressures were easing, at least in part of the country. The total stock available to rent at any one time has fallen back 10% from its peak level of mid-2009. Now, 10% may seem like a small number, when the stock had risen by almost 300% in the preceding two years. There are three mitigating factors.

  • The first is maths: a 10% fall from 2009 levels is a 35% fall in 2007 terms, when the base was a lot smaller.
  • The second is geography: the 10% average masks a 0% change outside Ireland’s five biggest cities and a 20-25% fall in the cities.
  • The last is that a bird never flew on one wing: supply only tells you part of the story.

The last point is worth explaining in a little more detail. In 2007, we saw rents rise because stock on the market was low, relative to the level of transactions: there were 6,000 properties for a monthly average of about 7,000 transactions (proxied here by the flow on to the market). Since 2007, while the stock available to rent has risen dramatically, behind the scenes, the number of transactions per month has increased steadily and the 2009 average was 14,000.

At first glance, that may seem odd – how can the number of transactions be increasing if people are leaving the country? There are two likely answers. Firstly, with everything from jobs to rents in flux, people may be renting for shorter periods and therefore moving more often (e.g. every year or even six months as opposed to every two years). Secondly, and this is probably the more important factor, one must consider the would-have-been first-time-buyers (FTBs). Based on the gap between the number of FTBs we might have expected in 2008/2009 for a population our size and the number we’ve actually seen, there are probably about 30,000 extra households renting, a big increase for a market that’s only used to 6,000 transactions a month.

It turns out that this gap between the market’s stock and its flow is quite highly correlated with the change in rents. The graph below shows the percentage gap between the flow and the stock, compared with the annual change in rents (both actual and annualised from monthly changes in rents). (I’ve left out the two December observations as they mess with the scales due to the sparseness of that month’s trading.)

You can see that when the number of transactions was greater than the stock on the market (i.e. when the blue line is in positive territory, pre-2008), rents were rising, while when it turns negative, rents start to fall. In fact, despite the variability of the various series, the correlation is very strong – 72%. This shows how important it is to look at the market basics – supply and demand – for what will happen next in rents, rather than jumping too soon to the Recession and the Global Economic Collapse and other stock excuses.

Transactions on the rental market and changes in rents, 2007-2009
Transactions on the rental market and changes in rents, 2007-2009

So far so good, but the blue line above does not appear to be heading back towards zero, let alone into positive territory. So are rents set to fall for the foreseeable future? Perhaps not. Today’s second graph (below) shows a related but slightly different measure, with the national rental market broken into Dublin (about 40% of the market), other cities and the rest of the country. The graph shows the stock available to rent in a particular region on the 1st of a month, compared to the average flow over the previous 12 months.

The idea is that as landlord and tenant start to see a something like a one-to-one relationship between them, rents will level off. You can see a clear divergence between the cities and the rest of the country. Not only that, you can also a steady improvement in the market imbalance in Dublin during the last few months. In fact, a more granular breakdown of the capital reveals that stock is already below the level of transactions in the city centre region. Next month’s report will reveal whether or not rents have levelled off in the city centre, but based on what we’ve seen working in both directions over the past three years, I would be expecting to see some evidence of rents levelling off, at least in Dublin city centre.

Rental stock relative to previous year's transactions, 2008-2009
Rental stock relative to previous year's transactions, 2008-2009

So, there you have it. Based on the swallow of falling stock, a prediction, however mild, that rents will level off in the next few months in Dublin and the other cities – and by implication that they more than likely won’t in many of the smaller rental markets around the country.

And what if they haven’t? What if this swallow turns out not to be heralding summer but just passing through? What will I say then? I might stall for time and say it’ll happen next quarter. Or I may say that if city-centre renters are prepared to live in the south or north city areas instead, the availability of substitutes has kept rents falling. Or indeed, if more supply comes on stream, I will probably say it turns out there was more supply ‘waiting in the wings’ ready to come on stream when the current glut eased.

But for the moment, at least, I’m happy to predict rents to level off in the main cities by mid-year!

  • Treasa ,

    Hi Ronan,

    in general, I don’t see any mention of the HSE rental support which may be providing a floor in rents. I can see in my own area in Dublin that rents have levelled off at approximately the level matched by government support.

    2007 is a bad baseline year to take in my opinion because it represented a supply blip. Supply tightened late 2006-2007 as stock moved from rental to sales markets. This fed into rents which rose quite a bit compared to previous years. I’m only voicing this as someone who was a tenant at that time and saw rents in my area in North Dublin rise by about 25% in that period having been static at the government supported level for the previous three or four years.

    • Ronan Lyons ,

      Hi Treasa,

      Thanks for the comment – on your second point (about 2007 as a base year), the data go back to 2002 for the rental market so the analysis can be extended. Without a formal graph to hand, I can say though that it wasn’t that much of an outlier from previous years in terms of general levels of stock and flow (particularly compared to 2008 and 2009). The relative balance was certainly different though, hence rents rising at 12-15% per annum – as per the reasoning outlined in the post.

      Your first point, on state-supported rents, is one well-made and one I haven’t explicitly factored into the analysis yet. I’ll look into it.

      R

      • Ciaran Daly ,

        RE: predictions, you could also have had

        Peter Schiff

        Here’s the proof from CNBC, of course, Bernanke says it wasn’t even possible that monetary policy could have caused the crisis!

        http://www.youtube.com/watch?v=Z0YTY5TWtmU

        • Niall ,

          Rónán, Firstly I find your tables very interesting and accept there is logic in your argument, particularly in relation to quality units in good locations, e.g. Dublin 4, 6, 7 & 9. Tenants can now pick and choose for both quality and location.

          Just too follow up on Treasa’s point, it appears that the maximum rental payments payable by DSFA now exceed rents in many areas. If the DSFA were to reduce rent supports by say 10% wef June 2010, then it must have a serious influence, particularly in Western Dublin and beyond. All those FF landlords must be praying that Ms. Hanafin keeps writing the cheques!

          The second point is emigration. There will be substantial net emigration in 2010 and I think it is clear that this also was the position in 2009. Emigration now includes substantial numbers of the traditional core Irish renters, those just out of college or coming to Dublin to work. With effectively no Public Service recruitment, there will be no “culchies” to fill all those vacant flats.

          Finally, how much of the reduction is down to the withdrawal of properties from the market as owners consider what to do, rather than occupied accommodation filled with happy rent paying tenants? There still is serious discounting going on, as can be seen in some of the more recent reviews on http://www.irishpropertywatch.com

          • FlyOver ,

            While I agree that the charts you have show Dublin to be settling into a rent stable environment based on demand, I just wonder how long those property owners can carry the new lower rents. Just because rents have stabilized means little for the owners of those properties if each unit rented is loss liter, so to say. If your mostly full property can not generate enough income each month to cover the business model, then I would expect to see a growing number of property owners going to the wall in foreclosures. It also looks like there is still a fair amount of supply that even if payments flatten out, there will be no room to start pushing rents up anytime soon. It will be interesting to see how long rents can stay at this level and still keep properties off the auction block.

            Also, looking at the second chart the two other groups, ‘other cities’ looks to be cyclical corresponding to the academic school year, high in summer months, low in school months. I would expect that with college students renting on campus and then living at home in the summer. As for the rest of the country line…well if you like the countryside, you can rent cheap!!!

            • Ronan Lyons ,

              Hi FlyOver,
              Thanks for the comment – it’s an interesting point, and perhaps we will see a large contraction in supply of boomtime landlords whose business model no longer holds. But it’s a bit of a catch 22. Given the high leverage by most investors during 2004-2007, they are likely to be in negative equity, meaning they are unlikely to be able to sell without some deal-making with their mortgage-holder. The people who would be able to sell without a loss would be those for whom rents are still, even though at 1999 levels, more than covering their mortgages!

              Re the students, Galway in particular seems to be cyclical. If those cities are short on NAMA-esque properties, they may level well before some parts of Dublin with plenty of recent construction.

              R

              • FlyOver ,

                An example of what is happening here in the States with rental property…

                http://online.wsj.com/article/SB10001424052748703415804575023483097973538.html

                Key take-away…”The venture had been struggling for months to restructure the debt but capitulated facing a massive debt load and a weak New York City economy that has undercut rents and demand for high-priced apartments. ”

                And

                By some accounts, Stuyvesant Town is only valued at $1.8 billion now, less than half the purchase price. By that measure, all the equity investors—including the California Public Employees’ Retirement System, a Florida pension fund and the Church of England—and many of the debtholders, including Government of Singapore Investment Corp., or GIC, and Hartford Financial Services Group, are in danger of seeing most, if not all, of their investments wiped out.

                • Stop the press – rents go up in January! | Ronan Lyons ,

                  […] the meantime, I can bask in the premature and perhaps transitory glow of my prediction of a month ago, while we have to wait until April to see whether it was indeed a one-off swallow or the herald of […]

                  • Mark ,

                    Hi
                    Dont forget also that most renters currently locked into a contract will definetly be renegotiating this year as it is a buyers market. This will surely push prices down even further.

                    • Time to face reality, as rents start to rise for family homes | Ronan Lyons ,

                      […] who’s been paying attention to the number of properties available to rent. Indeed, as far back as January 2010, the signs pointed to stabilising rents. Whereas the total stock sitting on the sales market has been doggedly at close to 60,000 for three […]

                      • Ireland’s two-speed rental market | Ronan Lyons ,

                        […] as each quarter adds to the last, the split becomes more and more apparent and something a few of us predicted would happen in late 2009/early 2010 looks to have come to pass. (For those wondering about […]

                        Leave a comment