Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Rents on the rise in the cities – a bad signal but a good sign?

The latest Rental Report, for Q1 2011, is out this morning. It finds that rents actually rose by an average of 0.5% during the first three months of the year. This is the second quarter in three that rents have risen and the evidence from April suggests that this may continue into the current quarter.

Some of the main headlines from today’s report are:

  • Rents are higher in Dublin and in Cork city now than a year previously, the first time since early 2008 that rents have risen year-on-year
  • Outside the main cities, the slow downward trend in rents continues but at a slower pace. The year-on-year fall in rents is down from 14% in late 2009 to 3% in early 2011.
  • The total stock of properties available to rent rose slightly between February 1 and May 1, from 16,000 to 17,000. It had peaked at 24,000 in mid-2009. For comparison, the typical amount of transactions per month is about 12,000.

So, with rents on the rise in some parts of the country, is this good economic news or bad economic news? Perhaps falling victim to the economist’s curse of “on the one hand, on the other”, I’m going to argue that rising rents constitute a bad signal (for competitiveness) but a good sign (of underlying economic strength).

Rising rents: a bad signal

Higher rents have an obvious downside. They take more money out of the disposable income of households. Accommodation and food are effectively the first things to be paid, after your taxes. So if your rent goes up from €950 to €1,000 – as they typically have in Dublin city centre over the last year – that puts a squeeze on your non-housing expenditure.

This, as explained before, has an impact also on the salary you demand. This might not work directly all the time. Most people don’t think to march into their boss’s office after their monthly rent goes up €50 and ask for €1,000 extra in their annual salary. But it ultimately does work. The price of accommodation does have a role in setting wage demands and certainly affects a company’s assessment of the cost competitiveness of a country.

So, rising rents are bad news, in terms of the signals they send out about Ireland’s cost competitiveness. This rising trend needs to be taken in context: rent levels are similar to those seen twelve years ago in 1999, so that is most certainly good news from a competitiveness point of view.

Rising rents: a good sign

At the same, though, I would argue that rents are a good sign of the strength of the underlying economy. This is a point similar to the one Cormac Lucey makes in his commentary. The economy is still suffering a range of body blows, in relation to monetary policy, fiscal policy, credit and the exchange rate. And yet rents have levelled off and may be even rising in some areas. What does this tell us?

It’s a good reminder that for every seven people that were working at the height of the boom, six are still in their jobs. They more than likely suffered a fall in their salary in 2009 but eventually the time comes for salaries to increase again. This will be most prevalent in exporting sectors, whose fortunes are not tied to largely moribund consumer expenditure in Ireland. (I say largely moribund, as no economy where things like the iPad 2 and the new Samsung Galaxy Tab 10.1 are consistently sold out can be regarded as completely lifeless.)

How does all this show up in rents? Consider the (not made-up) story of a friend’s friend. He’s moving abroad with work and looking to rent out his apartment, which is a spacious two-bed apartment smack bang between Google’s EMEA headquarters and Facebook’s. When asked to guess how much he had rented it for, I said €1,300, maybe €1,400, as this would be well above the city centre average for two beds but still down from peak two-bed rents. In fact, he had asked for €1,600… and got €1,700!

Year on year change in rents, selected regions, 2007-2011
Year on year change in rents, selected regions, 2007-2011

The chart above shows the year-on-year change in rents by four regions, from mid-2007 to April just gone. You can see the dramatic change from a booming rental market in summer 2007 to a market “in freefall” by late 2009 and, since then, a clear move towards stabilisation. In late 2010, the year-on-year trend in rents in Dublin city centre and in Cork city moved into positive territory and has stayed there since. Rents elsewhere are not stable but – at annual rates of decline of 2-3% – are probably close to stabilising.

There are two caveats worth noting:

  • The first is rent allowance. This may be propping up rents in the lower end of the market, particularly one-bedroom properties. However, whatever about the exact price level, the balance in transactions looks real.
  • The second is hidden supply. Is NAMA sitting on a stack of rental properties that are currently vacant? We don’t know. If its holdings are larger than we think, that could have an impact. Overall, though, the cities do not look overstocked with rental properties.

In summation, rising rents are bad news for renting households and – indirectly – for Ireland’s competitiveness. Rising rents are good news, though, about the underlying strength of the real economy. And, given the price of a home is ultimately determined by its rent, stable rents allow us to glimpse the real value of property. The sooner that national obsession is sated, the sooner we can get back to real economic issues.

Postscript… “But these are only ‘asking rents’ not the true rents achieved,” some will say. A very fair point, as my story about the Facebook-Google apartment shows. Does this matter? It certainly matters if you want to get the exact percentage point change in rents achieved to two decimal places. Advertised rents are only a proxy for the actual rent agreed in private between a landlord and their new tenant. However, they are a pretty good proxy. As the huge changes in the index since 2007 show, advertised rents are a good indication of trends and changes in trends. If inflation in advertised rents goes from 8% to 9%, one might not be certain if much has really changed in the market. But if inflation goes from -20% to +5%, something has most certainly changed. Not convinced? Put yourself in the shoes of a landlord that has read eight reports in a row saying rents are falling. If you’re upping your rent, you must have some reason to think you’re not pricing yourself out of the market.

  • Vincent ,

    Looking at that chart there would seem to be a cartel in operation. That level of mirroring has a hand behind it. Look at Oct-Dec 09

    • Don ,

      @Vincent in order for a cartel to be operating, all landlords in the same sector would need to be in collusion. Seems extremely unlikely to me

      • Rents up in Dublin and Cork cities but generally stable – report | Irish Free Press ,

        […] Economist Ronan Lyons, who compiled’s report, told that there are still more rental properties available outside the cities than current demand, but that isn’t the case in the cities.  Instead, rents are actually going up a little bit in cities. […]

        • Dara ,

          Instead of YoY % change, do you have a per region chart that just shows a bar for average rent for each month? thanks.

          • Vincent ,

            No Don, not the landlords in collusion but the agents.
            As we’ve no measure of actual rents anymore that we’ve one for house prices. So this is wide open to manipulation. And anyone glancing at the triple tango on that chart could only come to that conclusion. Especially since that chart in geographic terms counts everything inside a 150 mile arc.

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