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.
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.
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!