You may not have noticed it – with everything from IMF bailouts to general election developments happening the same day – but yesterday saw the release of the latest Daft.ie Report on the rental market. Its headline finding was that, for the second quarter out of three this year, rents rose slightly. As of October, rents were typically about 2% below where they were a year ago, a far cry from 2009 when rents were falling at a rate of almost 20% year-on-year.
How should we interpret the latest figures? John Fitz Gerald of the ESRI provides the commentary on the latest report. His point is that – for all the pandemonium currently happening with the Government finances – the real economy keeps ticking away:
Amid all the uncertainty and excitement concerning bail-outs and banks it can be easy to lose sight of what is important to long-term growth prospects – the performance of the real economy. One important aspect of this is the housing market. While the dangers of a housing bust were well flagged, its full consequences, especially in terms of the financial system, have proved even more serious than anticipated. For the housing market itself we have seen a collapse in prices since 2007 and, as a result, a collapse in building. Unthinkable though it may be under current circumstances, eventually new building will become profitable producing an inevitable supply response…
The first sign that things are beginning to turn will be a move towards rising rents. This will predate any recovery in house prices and any new building. As of today it is clear that rents have stabilised. From now on I will be watching the DAFT index seeking signs that rents are beginning to rise. I don’t expect to see much action over the coming year but time will tell.
This is a relatively upbeat message. In short, house prices are built around rents (much as Irish logic typically runs the other way), and rents are based on demand – trends in income and in the labour market – and supply. If rents are stabilising, and we know that supply is not being restricted, that must mean demand is levelling off, which reflects some sort of floor in income and in jobs.
If true, this reflects not a return to the Celtic Tiger era, but the end of things getting worse. A stabilisation in rents is also more concrete than export figures, which while very impressive do not always turn into jobs. And from that point of view, this could very well be the first step in a long process to economic recovery.
But, if rents do reflect economic stabilisation, it’s already clear that that recovery will have a different timetable in different parts of the country. Rents in Dublin and the other cities rose in the third quarter of the year – 0.7% in the capital and average of 1.5% in the other cities. However, rents outside the main cities fell by an average of 0.7%. For the cities, it was the second quarter in three that rents rose, but for non-city areas, it was the thirteenth quarter in a row that rents fell.
What is interesting is that despite the change in market dynamic since the start of the year, the average fall in Dublin (29%) is still greater than the average fall in the non-city areas (25%). This suggests that the correction will probably be of similar scale across the country but that the larger size of the city markets means that they are finding their new floor faster. What I have just written could equally apply to house prices: asking prices in Dublin are down by up to 45%, but in some parts of the country are down by less than 30%. We should expect Dublin to turn around first.
Back in the rental market, what is driving this levelling off? For example, is it being driven by demand for family homes from couples not buying? Or is it being driven by people moving out of home and into 1-bedroom apartments? To examine this in more detail, I recalculated the rental index for three different regions of the country, looking firstly only at three-bedroom houses and secondly only at one-bedroom apartments.
As you can see, looking at much smaller segments of the market like this makes the series a good bit more jumpy. But the overall trend is remarkably similar across all segments, from 3-beds in Dublin to 1-beds in rural areas. So it’s clear that there aren’t wildly different trends by segment. Only in the last few months have family homes in Dublin – whose rent had fallen by more to start – performed significantly better than 1-beds in the capital. Rents for 3-beds in Dublin have risen by 5% in recent months, compared to an increase of 1% for 1-beds.
That’s the price side. The other thing economists look at is quantity: what volume of people are coming on to rent their properties or to find a new place to live? The second graph, below, shows two figures, representing two different ways of looking at how the oversupply of rental properties has fallen in recent months, across sixteen regional markets in Ireland. The dark brown line shows the fall in the stock available to rent on the 1st of November, 2010, compared to the average level sitting on the market in 2009. But one could argue that this is just relative: if somewhere has three times too much stock, it will take a 67% fall for the market to get back in balance. And in truth we don’t know exactly how much each area was over-stocked in 2009.
Therefore, there’s a second line, the red line, which shows how the stock sitting on the market on the 1st of November compares to what the market has typically processed each month since the start of 2009. This a reasonable rule of thumb, based on the life-cycle of a rental ad. Both series are put on the same scale, so a bar to the left indicates a glut of properties still remain, while a bar to the right suggests a shortage of properties.
This is probably the clearest way of showing the significant gap between some of the city areas and rural areas. Dublin, Cork and Galway have seen huge falls in the number of properties available to rent at any one time – almost 50% in some parts. With the exception of Cork – which looks like the number of properties on November 1 exactly matched the typical monthly throughput on the market there – these cities also look to have a shortage of properties compared to monthly traffic.
This is the market at the moment, of course. Significant tax increases in the Budget – or an unexpected change in property tax – could affect the balance currently being seen in the city areas. But the overall picture emerging from the property market is one of two tiers: cities and the rest.