“Scarcity drives year-on-year rents up for the first time since 2007”? I know what you’re thinking. The word scarcity has been used to describe something property-related in Ireland. That doesn’t sound right. Bear with me! What do we know now, following yesterday’s Daft.ie report on the rental market in 2010?
- The national rent fell by 0.6% during 2010, compared to falls of 10% and 15% and 10% in 2008 and 2009. Thus the overall picture is one of stabilisation.
- Rents in Dublin actually rose in year-on-year terms, up 2% in December, the first time they’ve risen compared to a year previously since late 2007.
- Elsewhere, rents fell – by an average of 2.1% in the other cities and by 3.7% outside the major cities.
- Rents are at levels last seen in 1998, based on a composite of CSO and daft.ie figures. The average rent in Dublin was €1,074 in December 2010, compared to €1,066 in late 1998.
I know from doing interviews with the media yesterday that the most surprising fact is that rents are rising. Christopher McEvitt on Morning Ireland pointed to emigration, while Matt Cooper on the Last Word pointed to the fact that house prices are still falling. So given the economic horror-show that was 2010, how on earth did rents actually rise in some parts of the country?
The answer is all about supply. The total number of properties sitting on the rental market increased from less than 10,000 in early 2008 to almost 24,000 in mid-2009. Fast forward to the start of February 2011 and the number is back down below 16,000. At the same time, the number of transactions the market is processing each month seems to have increased dramatically, from about 7,000 during 2007 to 13,000 in 2010. A useful rule of thumb is that where the stock sitting on the market at any one time is above the number it can process in a month, then rents will fall. That surplus has shrunk rapidly in recent months.
One phenomenon in particular can at least in part answer those wondering why emigration isn’t having an impact at the moment: the would-have-been first-time buyer. Suppose Ireland had had a “normal” property market over the last three years (whatever that means!). This would have meant probably 100,000 new households formed for the first time, through people becoming first-time buyers. Instead, we’ve seen only about 40,000 first-time buyers, so there are probably about 60,000 households who in other circumstances would have bought but haven’t, given market conditions. These are people staying in rented accommodation.
It would be natural to think that as they grow older, they are moving into larger properties. Combined with greater emigration rates among 20-somethings than 30-somethings and greater oversupply of apartments than homes, this might lead us to reasonably think a divide is opening up between the 1-2 bed segment of the rental market and the 3-4 bed segment. Also, if cities are where the jobs are, and non-cities are where the surplus properties are, this may add another dimension.
Below, there are two graphs, showing how the total stock on the market has evolved in four regions of the country: Dublin, other cities, Leinster, and rest-of-country. They are set to the same scale for the different regions, where 100 represents the average number of properties on the market during 2007. If we take as a general estimate from above that the market is able to process each month twice now what it did four years ago, then the critical line now is 200: above that, the market is over-supplied; below that, it may be suffering from shortages.
The first graph shows the stock sitting on the market for the 1- and 2-bed segment of the market. Until the start of 2009, there is very little difference across region. At that point, though the city areas – and to a lesser extent Leinster – start to exhibit a noticeable downward trend, together with seasonal ups and downs (the third quarter is always the busiest). Dublin has already reached the 200 mark, i.e. approximately back in balance, while the other cities and Leinster are heading there but not there yet. Notice, though, that the rest of the country (i.e. Munster and Connacht-Ulster outside the cities) still has perhaps three times as many one- and two-bedroom properties available to rent as it’s able to process in a given year.
What is astonishing is how similar the picture below is, which is for 3- and 4-bedroom homes. Again, it’s only in 2009 when the different regional trends are noticeable, and again Dublin has already gone below 200, while Leinster – and this instance, particularly the other cities – are very close. In the rest of the country, however, there is only the faintest hint of a fall-off in oversupply and it still looks like more than twice as many properties as tenants.
Clearly, there are important factors not dealt with in the above analysis. For example, is rent allowance putting a floor on rents, particularly for smaller properties where allowances have not been cut by as much? That’s a possibility but that affects price, rather than quantity: the quantities on the market suggest an underlying balance, even if the price is too high. It’s also worth remember that only one in five ads placed on daft.ie accepts rent allowance, so there’s a large market that works to a certain extent independent of that scheme. There is also the NAMA factor: how many properties are sitting vacant as they are transferred from developers, through the banks, to NAMA.
Overall, though, the underlying numbers of the rental market suggest that the major rental markets in Dublin, its surrounding area and the other cities are coming back in some sort of balance. While tenants would prefer even cheaper rents, this is good news for not just landlords. It signifies some sort of balance in the underlying labour market. And it is also the first step in a balancing out in the sales market: if you don’t know the stable rent of a property, you cannot know its long-term economic value and thus its price today.