Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Rents stabilise during the first months of 2010

The latest Daft Report, for the rental 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 cities.

Of the 35 different regional markets around the country, 15 of them showed a positive quarter-on-quarter on change in rents in the January-March period. Almost all of the remaining 20 markets had quarter-on-quarter falls of less than 1%, a far cry from the 3%-5% falls that became standard during 2009.

Perhaps significantly, the average rent in Dublin and Cork cities rose slightly, indicating that the significant reduction of supply in properties for rent in the major rental markets (from very high levels) is having an impact on rents. In particular, the Dublin city centre rent during the first quarter of 2010 was 1.3% higher than in late 2009.

This is not to suggest that the bottom of the market has definitely been reached nationally. The market has stabilised somewhat, with a quarterly fall of 0.4% compared to 10 times that fall each quarter during 2009. However, the big kick in rents came in January, and the national average rent has fallen back slightly in the three months since.

Stock on the market

Coupled with this, the total stock available to rent across the country has risen since the start of the year. The total number of properties available to rent in the country last July was almost 24,000. By February 1st, it had fallen to 18,800, but on May 1st it was back up to 19,800. The graph below shows the percentage difference between the number of properties available to rent at any one time to the typical number of transactions per month, across different regions. Generally, a market in equilibrium would have these close to level (i.e. 0%). The further above zero, the more likely it is there is downward pressure on rents, as landlords find it difficult to rent out their property quickly.

Stock of properties available to rent, relative to monthly transactions, by region
Stock of properties available to rent, relative to monthly transactions, by region

It is of course possible to argue that different regions would have different “equilibrium” levels (although I’m not convinced that would explain all the difference), but the more important thing is the trend. Month after month of easing pressures during late 2009 have translated into stabilising rents. Since February, though, the competition among landlords has resumed somewhat. Hence the caveat about calling the bottom of the market…

Residential Yields

As I’ve pointed out many times before, the rental market is important not just tenants and landlords but for those with mortgages and for taxpayers, because of the importance of yields in property. Page 10 of the report outlines average yields in all parts of the country, by bedroom number. The green/red numbers after the yield are how the yield has changed in the past twelve months (which essentially measures whether rents or house prices have been falling faster). The predominance of green means that yields for most segments of the market have improved since early last year.

It’s useful to look at the table with NAMA’s 6% benchmark yield in mind. While it seemed a world away a year ago, average yields are getting close to 6% in a number of market segments, mostly one-bedroom segments in the cities. Limerick (6.0%) leads the way, followed by Dublin city centre, West Dublin and Waterford all of which are between 5.5% and 5.6%.

In Waterford, the two-bedroom segment also has an average yield of over 5%. However, in the same city, the average rent for five-bedroom properties is just 1.8%. This highlights an overall trend throughout the country: yields for a property with particular number of bedrooms in one area tend to be similar not to yields for other properties in the same area, but to similar-sized properties elsewhere.

This suggests either or both of the following. Firstly, yields for smaller properties (i.e. those more likely to be investments) may have a higher equilibrium level than those for family homes, where owner-occupiers pay a premium above rent to have the security of tenure and freedom to tamper with their home. Secondly, owner-investors may have been faster to come to terms with the new market conditions than owner-occupiers, an adjustment that owner-occupiers may yet have to make.

In other news…

Among the variables that enter the regressions that underpin the Daft Report are a number of “white goods” and utilities, as anyone who’s ever posted an ad on Daft will know. One thing we spotted a few years ago was that no matter what way you ran the numbers, a significant dishwasher premium – about €50 a month! – existed. That’s right, controlling for everything else, with two identical properties, if one had a dishwasher, it could command a rent of €50 more than the other. Even more surprising, a premium of this size didn’t really exist for any other white good, certainly not the washing machine that most would list as their most important “white good”.

Well, it looks like the recession is sending people back to the sinks! Below is the trend in various premiums (or premia if your Latin takes you that way), including dishwashers, washing machines, dryers and alarms. As you can see, dishwashers are so Celtic Tiger – dryers apparently less so (presumably related to the bad summers we’ve been having!).

Rent premium associated with various property attributes, 2006-2010
Rent premium associated with various property attributes, 2006-2010
  • Jagdip Singh ,

    Hi Ronan,

    Interesting commentary, particularly on the contrast in yields between small and large properties. NAMA has chosen a Valuation Date of 30 November 2009 (a decision that some have said should be changed for future tranches as it may end up costing taxpayers €5bn according to the London Times) and also the LEV Regulation bars any analysis produced after 10 January 2010, so I’m not sure there’s any change in how NAMA values property as result of yields firming up.

    I am surprised that the headline isn’t – “Rents dropping by 1% per month and 10% per annum” (April 2010 cf March 2010 and April 2010 cf April 2009).

    We probably shouldn’t be surprised that rents are showing some resilience. As any prospect of short(medium?) term capital appreciation vaporises (Annette Hughes of DKM talks today of prices dropping 40% from today’s values, Moody’s last week were taking about another 18%, Morgan Kelly was talking about upto 80% total fall from peak whilst only the MfF, it seems, is talking about stability and realistic prices)landlords will look to rent to make the investment pay.

    I think rents will continue to fall because a large stock of housing is not backed by a mortgage (800k mortgages, 2m properties including empties) and we don’t have a small number of big landlords that can act as a cartel (the NPPT report said there were over 1000 landlords with over 10 properties)and takehome pay will continue to come under pressure. However I think the fall will not be as great as the fall in capital values as the market imperfectly struggles to gain some sort of equilibrium between buying/renting.

    • Jagdip Singh ,

      Oops, Annette Hughes is predicting falls of average property to €140k from €200k today so 30%, not 40% – early morning pre-caffeine calculations!

      • Jagdip Singh ,

        And finally from me.. I wonder to what extent the social security rental payment puts a floor under rents, particularly at the cheaper end of the market.

        I thought Mary Hanafin had announced a review of the scheme, but from recollection that was supposed to happen last month?

        • Ronan Lyons ,

          Hi Jagdip,
          Thanks for those comments – it seems that your resilience point and your competition among landlords point are at odds? As in, if landlords can’t collude it would sure be difficult for them to “make the investment pay”, given the supply on the market. Your point about properties without mortgages is well-made though – it could be a case of new landlords getting squeezed by old ones.

          On the social rents, I’m not so sure – only one in five landlords will even consider taking somebody on rent allowance, so while they have a floor, surely the others don’t? Or at the very least, there’s a negative premium attached to not accepting rent allowance… (I might see if I can put that into the model, now that I think of it.)

          Thanks for the comments as always,
          Ronan.

          • Jagdip Singh ,

            Hi Ronan,

            In terms of resilience, if rents drop by 10pc this year and property drops by 20pc then would you call the rental market (more) resilient? That’s what I meant, perhaps a poor choice of words on my part.

            What you say about rental allowance is very interesting but even if 80pc of landlords won’t rent socially, to what extent would their outlook on prices change if the rent allowance was reduced?

            Best wishes

            • Daft.ie Blog » Blog Archive » Daft Rental Report out – rents show signs of stabilisation in early 2010 ,

              […] economist Ronan Lyons has some further analysis over on ronanlyons.com, including a look at exactly how much extra certain white goods can add to a property’s […]

              • CorkBoy ,

                Hi Ronan,

                I think the slight increase in Dublin is a bit misleading. The increase is quite small at 1.3%. I say this because landlords are only recently (last 6/12 months) discovering that asking price, even a lower than previous asking price, is not necessarily what they will get as a rental price.

                Much as it has been for a few years in the selling market, negotiating (and hard negotiating at that) is now becoming an aspect of the rental market. A drop of 10% on the asking price is not unobtainable.

                So while i agree with you, that the 1.3% increase certainly shows that the price decline is slowing; i’d be slow to say that there is a real increase.

                What do you think?

                • Laura ,

                  Ronan, your figure of 1-5 landlords not considering social welfare recipients for rent cannot be accurate on an overall basis. While an individual landlord with just one property is going to target a “premium” market, most of the larger landlords (the 1000+ with the 10+ properties) will depend heavily on this market, particularly those with small terraced houses and houses converted into multiple units. That said, there is considerable anecdotal evidence that such landlords will demand cash topups from tenants and declare a lower rent so the tenant qualifies for support.

                  This must be extensive, since the area where I live is about 75% welfare, despite the average rent when I moved in being around 500 for a studio and 600-700 for a one bedroom. I doubt landlords are going to bargain down if they have high overheads.

                  That said, towns and rural areas outside the cities are characterised by a much higher acceptance of rent allowance recipients. However by accepting them they do lose control over their ability to raise rents as they feel appropriate without losing the tenant or creating a serious problem in rent arrears for the tenant.

                  • Ronan Lyons ,

                    Hi Laura,
                    Thanks for your thoughts on this – I might be tighter with my language in future when I talk about this. The figure is definitely correct for those advertising on daft.ie. There may of course be landlords out there working under the radar/offline and perhaps exclusively with welfare recipients.

                    R

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