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.
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.
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.