Property Market

Stop the press – rents go up in January!

16 Feb 2010

"Every single one of the sixteen regional markets analysed showed an increase in rents in either December or January."

You read that headline right. Rents actually increased in January, compared to December (and indeed November). The latest Daft report is out today, this one covering rents right up to end-January 2010. Michael Taft, who runs the popular Notes on the Front blog, provides the commentary. Some headlines:

  • Rents fell by just over 15% on average during 2009, compared to 12% in 2008. (Rents peaked in early 2008.)
  • Compared to peak levels, rents in Q4 2009 were 27.5% lower in Dublin and 23% lower in the rest of the country.
  • In January, rents rose month-on-month for the first time in 24 months.

One thing that is particularly interesting is that while the jump up in the index in January is essentially being driven by Dublin, the levelling off in rents isn’t. Every single one of the sixteen regional markets analysed in the model showed an increase in rents in either December or January (7 in December, 11 in January – Galway city and West Leinster in both months).

In fact, Dublin seems to have missed the party somewhat, with none of the six markets in Dublin showing an increase in rents in December, before all six show increases in January. The jump in rents in Dublin in January was 2.7%, the largest one-month jump in rents since July 2007. Elsewhere, in January, rents rose by a much more modest 0.5%. The overall effect was a 1.5% increase, the sore thumb sticking out at the end of the graph below, which shows month-on-month changes in rents from January 2006 to January 2010.

Month-on-month change in national average rent, 2006-2010

Month-on-month % change in national average rent, 2006-2010

Is this seasonal? After all, January is to more mature renters what September is to the student cohort of tenants. The short answer is that we don’t know. One month is just far too short a period to reliably base any predictions. What can we say, though? Well, the first thing we can say is that it doesn’t look particularly seasonal. If you showed me that graph and asked me to predict a seasonal effect of higher volume of transactions in January, I might have guessed a fall of less than 1% rather than more, but that would be it.

We can go one better, though, and say that it looks more structural than seasonal. The main reason rents were falling so fast was that the total stock available to rent had quadrupled from 6,000 in mid-2007 to almost 24,000 in mid-2009. Since then, the stock to rent has fallen by 20% on average – and significantly more (up to 50%) in some parts of the country (e.g. Dublin city centre, Galway city). The second graph, below, shows the change in rents in January across each of the 16 regional markets, compared to the contraction in supply in that market since mid-2009. Top and left means a large jump in rents in January, following a sharp contraction in supply – bottom and right, means no increase in rents and supply not contracting.

Change in January rents and fall in supply to rent, across the country

Change in January rents and fall in supply to rent, across the country

For the bulk of areas, the downward line is apparent – the contraction in supply appears to explain the January increase better than saying “well, January is January”. (And in one sense, the numbers below 0% on the rent axis are a distraction, because rents in those areas actually rose in December.)

Who should care? Who should cheer? Landlords? We all should care. The reason stable rents are so important for the broader property market (and thus the economy) is that rents provide the only clear signal on what the true price of a house should be. The annual rental income should be thought of as the % AER on property. Knowing what that income is helps the market know what the value of the properties themselves is. So, particularly when tenants have not had things this good since the year 2000, the market bottoming out is good news all round.

So far, so optimistic, in terms of catching a shard of light in the tunnel that is our property bubble bursting. Caveats? Here are a few:

  • The market may be getting back into balance in some parts of the country (balance = stock sitting on the market more or less the same as what the market can process in a month), but in other parts of the country, severe imbalances remains. In most parts of the country outside the major cities – South-East Leinster, Munster (ex-cities), Connacht (ex-Galway) and Ulster – there is still about twice as much sitting on the market as it can handle in a month, a backlog that will presumably have to be cleared at some point.
  • There may be supply waiting in the wings. The number of vacant properties in the country has been estimated at 300,000. If even just 10% found its way on to the rental market in a hurry (say, following news that rents has bottomed out – gulp!), that could push rents further down. More generally, if developers are sitting on property pre-NAMA transfer, regardless of whether the properties are transferred to NAMA or not, they will ultimately find their way back on to the market, either rental or sales.
  • Above, I mentioned how this is good news not just for landlords but for anyone who owns property or has a mortgage, because a stable rental income gives us an idea of what the true value of a property is. I mentioned thinking in terms of a % AER, or yield. NAMA believes that yield should be 6%. That is a reasonable assumption but is – unfortunately for homeowners – a good bit away from where we are now. Matt Cooper once asked me: “if house prices are falling by 30%, how come rents are only falling 20%?” The causality goes the other way. Rents will determine where house prices end up. Even if rents level off now, a healthy yield means that house prices will have to fall by a good bit yet (from the 30% fall in asking prices seen by end-December 2009). That’s a post for another day, though.

In 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 summer.

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14 Comments

  1. Ronan Lyons said on February 16, 2010 | Permalink

    A quick explanation of the point that this doesn’t look like your average seasonal January effect:
    January generally looks like a more optimistic version of the year just gone (that’s the seasonal element). In January 2007, the 2% jump in rents (an annualized 25% jump in rents) happened at a time of rents rising by just 10%. In 2008, the number was 1.1% (ann. 14%) compared to the yr/yr increase of 6%. In January 2009, the month/month change was -0.5%, an annualized fall of 6%, compared to the year-on-year fall at that time of 13%.
    Hence my saying in the blog post: “If you showed me that graph and asked me to predict a seasonal effect of higher volume of transactions in January, I might have guessed a fall of less than 1% rather than more [than 1%], but that would be it.”

    Hope that helps,

    R

  2. John Heavey said on February 16, 2010 | Permalink

    Ronan, you’re probably tired of being asked this question but I rarely see it mentioned when people are discussing yields as a way of guesstimating property values. It seems to be that while this might be as good a way as any to value buy-to-let, surely some economic value needs to be factored into residential property i.e. ownership, stability, discretion re changes to property, building up a long term asset etc. Do any of the models attempt to capture this ? if not then I think the rental yield model applied to PPR is a very crude metric indeed.

    Enjoy the blog. John.

  3. jc said on February 16, 2010 | Permalink

    What are you thoughts on how changes in rent allowances might affect the market?
    Theories suggest they impose an artificial floor on prices which happens to be somewhere around where they are now stabilising?

  4. Pat said on February 16, 2010 | Permalink

    Ronan,

    I renegotiated my lease in January. So I found this very interesting.
    I found from researching my area in Dublin that prices had dropped by 15%. I also knew that it would cost my landlord at least a month’s rent to get a realtor to rent it. From this I was able to gain a 21% reduction in my rent for the year.
    My question is how many homes are in this category of being in their 2nd or more year of rental by same occupant. As I’d imagine you could get a pretty good sense of the overall value of the market by combining the figures. Does revenue ever release figures on rent relief?
    Thanks,
    Pat

  5. JL said on February 16, 2010 | Permalink

    This is presumably a statistic compiled based on the asking rent figures on daft.ie?

    If this is the case, and let’s say all of the best priced (cheapest) rental properties were snapped up in December/January, the more expensive ones left on the market would surely provide you with the upward average that is being heralded here?

  6. Ronan Lyons said on February 16, 2010 | Permalink

    Hi JL,
    No, as the model/index is based on newly listed properties rather than what’s sitting on the market. An important point, so thanks for giving me the opportunity to clarify this.

    R

  7. Ronan Lyons said on February 16, 2010 | Permalink

    Hi Pat,
    Interesting point – I’m not sure if the Revenue do publish those stats are not, I can have a look though. Thanks,
    Ronan.

  8. Dan said on February 17, 2010 | Permalink

    Hi Ronan,
    One thing I’ve observed recently is that there are an awful lot of people sharing houses and apartments now, compared to a few years ago when it was often 1 couple per property.

    So if you imagine that 1 couple used to rent a property for €800, but now 2 couples pay €450 each, well then that is a 12.5%/€100 overall increase but in reality its a near 50% decrease, plus there is also an extra empty property on the market.
    Judging by the surge in broadband contention issues/complaints floating around Irish forums recently, I wouldn’t rule out it out.

    Excellent site btw

  9. Ronan Lyons said on February 18, 2010 | Permalink

    Hi Dan,
    Thanks for that – interesting. If I follow, we would expect to see lots of excess supply and rents rising. One to watch, so.
    My own opinion is that this January is a combination of usual seasonal effects and contracting supply.
    R

  10. Niall said on February 19, 2010 | Permalink

    Rónán,

    As market rents have now fallen significantly below the SW support rate, the forthcoming publication of the DSFA review of rent support levels, which will be completed by 31.3.10 can only lead to a further contraction in supports. A cut of 15% or so is required, which will force rents down further. See Dáil question Ref No: 5546/10

  11. Mary said on February 24, 2010 | Permalink

    24th February 2010
    I noticed thousands of properties located in the six counties of N.I. being dumped on DAFT over the last week. This is pushing the “for sale in Ireland” graph into a steep rise!

  12. Ronan Lyons said on February 24, 2010 | Permalink

    Hi Mary,
    “Dumped” is the wrong word – through daft.com, Daft Media Ltd has been expanding in Northern Ireland over the past year. This must reflect new estate agents joining the listings.

    Hope that helps,
    R

  13. Mary said on February 24, 2010 | Permalink

    Well whatever way this is decribed Ronan, the daft statistics on properties for sale are gone up by nearly 6,000, almost 5% in a week as a result of these NI figures and it’s already had an impact on the shape of the graph for properties for sale. The Daft statistics are being used as indicators of the state of the property market in ROI and I just think that it creates the impression that things are getting worse down here instead of better!

  14. Ronan Lyons said on February 25, 2010 | Permalink

    Any time I see the unofficial statistics based on daft (or anyone else’s) raw listings used, I try to point out that the unofficial lists suffer from a number of problems, this being one. The stock for sale series in the Daft Report corrects for a number of issues and is restricted to the Republic only (check out the last few press releases for the real trend in stock for sale) – that is a far safer statistic and if you see anyone basing their prognoses on the property market on some raw count, feel free to point that out.
    R

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  1. [...] market during Q1 2010, is out today, with a commentary by Jill Kerby. The main headline is that, as suggested by the January figure, rents are stabilising, particularly in the [...]

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