The latest Daft Rental report is out this morning. Its at-first-glance unexciting headline is that rents are stable: not only quarter-on-quarter but also year-on-year: the national average rent is just below €825 and has been there solidly since about this time last year.
Is that all there is to it, then? We’ve reach equilibrium in the rental market and – once we find out the “right” yield, or relationship between rents and house prices – we’ll know where equilibrium in the sales market is too?
It’s unlikely to be that simple. For one thing, rents in the three main cities are actually up year-on-year, and are offset by rents elsewhere being about 3% lower year-on-year. Rents in Cork are actually almost 5% higher now than a year ago.
What up with the People’s Republic?
Some might suggest that perhaps the spike in Cork rents is because of the flooding at the end of March and start of April. The damage to homes may have brought about a shortage of rental accommodation, as some homes are rebuilt and restored. It’s an interesting suggestion, showing the susceptibility of the rental market to random shocks.
But at least this time around, it’s definitely not the case. The number of properties available to rent in Cork increased from an average of just over 600 in the first quarter of the year to over 1,000 in the last three months. In fact, all across the five major cities, there has been a substantial increase in the number of properties sitting on the market, typically by one third, in a few short months.
So we may be seeing the rental price interact with the supply on the market. Suppose developers or others have urban properties they have been trying to sell, without success. Nine months of a stable rental market convince them to try their chances renting the properties instead.
This sounds plausible and leads to an obvious follow-on question: does the increase in supply mean that rents are due to head south in coming months, as the impact of the fresh supply is felt? Perhaps not. The graph above shows the annual change in the number of properties sitting on various rental markets from the start of 2010 until August 1st this year. What’s of note is that the rush of properties this summer season is actually smaller than the rush last year.
In June and July 2010, there was an average of 2,750 properties available to rent at any one time across Ireland’s four cities outside Dublin (Cork, Galway, Limerick and Waterford). In June and July this year, it was below 2,650. Not a huge fall certainly, but definitely not a fresh rush on to the market. All in all, the trend in the stock on the market is downwards.
What is the current return on real estate?
If rents do actually stabilise, at least in the cities, one thing we will be able to do is figure out what the “long-term economic value” of any given property is (NAMA take note!). This is because ultimately a property is an asset, one that gives you income (if you’re an investor) or saves you outgoings (if you’re an owner-occupier).
The second graph, below, shows the annual rental income for the average property in three regions of the country, from 2006 (i.e. 2006 rental income compared to 2006 prices) until the second quarter of this year. Particularly since late 2009, when rents have levelled off (and as house prices have continued falling), the yield has improved considerably and now in Dublin is not too far off the NAMA benchmark yield of 6%.
For the yield in the “rest-of-country” outside the cities to correct to an average of 6% from its current level of 4.5%, a swing of one third is needed. That means either static house prices, if and only if rents were to increase by 33%, or if rents stabilise then prices need to fall another 33%.
The average asking price in the rest-of-country is currently €180,000 and a 33% fall would push that down to €120,000. This would be a fall of just over 60% from the peak, something that seems a reasonable estimate peak to trough fall (particularly with Dublin asking prices already down 50% but not yet stabilised and with firesale prices at 65-70% below the peak).
While 6% is a nice round “target”, it’s at the end of the day an arbitrarily chosen round number. What actually determines the yield on a particular property – in particular why yields on smaller properties (one- and two-beds) are higher than those on larger properties (4/5 beds) – is to my knowledge unknown. (And the topic of some of my research at Oxford and my presentation at the ISNE 2011 Conference later this week!)