Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

May 2014

Rent allowance and the curse of good intentions

Earlier this week, the Irish Times ran a story entitled “ to continue use of ‘rent allowance filter’ on searches“. The thrust of the story was that the Department of Social Protection (DSP) had asked to remove a function that allows landlords to refuse to let to people on rent allowance and that said no. With the local and European elections just around the corner, unsurprisingly politicians jumped on board. Labour TD Aodhan Ó Ríordáin said that he was disappointed over this decision and would like to come before the Social Protection Committee – of which he is a member – to explain themselves. Perhaps summing up the mood for some, a spokesperson for Focus Ireland said: “Can you imagine the uproar if landlords were allowed to say, ‘Travellers or Muslims not accepted’?”

One of life’s big lessons, in my opinion, is that nine times out of ten, if someone else is acting in a way that seems odd to you, you probably don’t know the full story. And so it proves with this. As most readers will know, employ me to undertake the analysis for the quarterly Reports and, by coincidence, the latest Rental Report was out on Monday. So, the day the story broke, I was in Daft HQ and was able to find out the real story. For me, it is a salutary lesson on the curse of good intentions.

Actually, I had been aware that was working with the DSP. In early April, the unit responsible for Rent Allowance got in touch with me originally about this and I passed them on to Over the following few weeks, Daft and the DSP worked through a plan and in late April, the filter was removed on a trial basis. The trial was supposed to last a week – but collapsed after just two days due to overwhelming user feedback. The users who complained were – wait for it – those in receipt of Rent Allowance. They were joined by one of the country’s largest charities, who got in touch with, asking them to reinstate the filter.

To see why, put yourself in the shoes of someone on Rent Allowance. With the filter, you go to Daft, tick the box that says “Are you looking for places that accept Rent Allowance?” and (as of this morning) are given about 700 results for Dublin city. If you follow up on any of these ads, there is no question of being turned away because you are on Rent Allowance. If that box is taken away, you would be given all 1,800 rental properties in Dublin. This sounds like good news, but the true cost of the missing box is revealed when you start following up on these ads. Roughly speaking (based on today’s numbers), you have look three times as hard to find a property that will even consider you. And time has a cost, whether you’re on Rent Allowance or not.

The removal of the filter – while no doubt well-intentioned by all concerned – actually made matters worse for the very people everyone is trying to help. Much as with rent caps, which I discussed earlier in the week, hiding what you don’t want to see will not address the underlying causes. So, why are landlords so keen to discriminate against Rent Allowance recipients?

Note that in Dublin, where rents are rising at almost 15% year on year, roughly two thirds of landlords currently will not consider someone on Rent Allowance. In contrast, if you were to search in Donegal, where rents are actually still in decline, almost all landlords would accept someone on Rent Allowance (190 out of 230, based on this morning’s numbers). While this story started out with a technical issue, namely a button on a website, the underlying issue is economic and inextricably linked with Monday’s Daft Report and indeed the broader housing crisis: a lack of supply. The tighter supply is, the more picky landlords can be. For example, I know of houses in Dublin currently where landlords are able to say “no, I don’t want three 20-something professionals renting here, I want a family”. No landlord in Dublin would have been that choosy in 2009, when rents were collapsing.

We could of course simply make it illegal for landlords to discriminate on the basis of Rent Allowance, being a 20-something professional or any other criteria we don’t like. But again, that doesn’t address the underlying issue and merely pushes the problem out of view. If those of us who do not have to depend on Rent Allowance want to help those who do, hiding the problem will not make it go away. To assuage our “middle class guilt”, for want of a better term, we need to look at the underlying issue of a lack of supply. And for that, as I argued on Monday, we need to look in particular at how the government controls planning and land use. Hopefully Deputy Ó Ríordáin will be to the forefront in calling for land use and planning reform – I’m more than happy to share my thoughts with him.

Construction, not rent control, the solution to the housing crisis

Today sees the publication of the latest Rental Report. The full report is available here, while below are my thoughts on what the latest report tells us.

Most analysis of the housing market – both sales and rental – is currently done through the lens of the last housing bubble and where it was when it burst in 2007. However, that is a point of view that is increasingly out of date. In the rental market, for example, rents bottomed out in Dublin and Cork cities in late 2010 and had actually bottomed out a year earlier in Galway city. Ireland’s urban centres are four years into a new housing market cycle – and yet there is still very little evidence that anything is being done about what is now a chronic shortage of accommodation in Irish cities.

With local and European elections just a couple of weeks away, a number of candidates – particularly in the Dublin constituency – have been talking about rent control as a necessary remedy for the ills of rising rents. However, while the desire to simply make illegal what you don’t like is understandable, it mistakes the symptom for the underlying disease.

On the one hand, tenants already have reasonable security of tenure. Since the Residential Tenancies Act 2004, once a 6-month probationary period has been passed, tenants have security of tenure in four-year cycles, something that is known as a “Part 4 Tenancy”. (To ensure this is the case, tenants who have signed one-year leases need to notify their landlord about their intention to stay – more here.) There are a certain number of conditions under which a landlord can terminate a tenancy, but getting higher-paying tenants is not one of these.

On the other hand, rising rents are caused by a lack of accommodation in urban centres and reducing rents will discourage the provision of new accommodation, thereby making the problem worse. What we have seen in both sales and rental markets is reasonably robust demand for accommodation in Dublin and other cities, which has pushed up both rents and prices. These should be acting as a signal to bring about new supply – so why has significant new building not started in Ireland’s cities?

Whether construction of new homes takes place depends on whether revenues exceed costs. Revenues come from rents and house prices, which both appear to be at the cusp of affordability given incomes in Ireland. Therefore, if rents and prices are high enough, the solution is about reducing costs in construction – not about capping rents and thus further discouraging the very construction that would alleviate the accommodation crisis.

The cost base in construction includes capital, labour, land and regulation, as well as materials, whose prices are typically set on world markets. What is needed now is for the Government to go through each element in the cost base and develop actions to lower costs. It may surprise some readers to learn that the cost of building a house is 3.3% higher now than in 2007.

Labour costs in construction fell once, in March 2011, when hourly rates were reduced by 7.5%. But in an economy where the average disposable income fell by 25% between 2006 and 2012, and where there are significant numbers of long-term unemployed construction workers, is that enough? More importantly, the minimum hourly rate for a basic operative in Ireland at €13.77 remains a quarter higher than in West Germany (€11.05, a figure which will rise to €11.30 by 2017). Department of Environment figures indicate that for every €1 of materials, €2 is paid in wages, so the wage rate in construction has a real effect on levels of construction.

Just as important is the cost and supply of land. If people are allowed to hoard land or sit on derelict or vacant sites, this imposes a cost on the rest of society. Dublin City Council’s proposed levy on derelict and vacant sites may help encourage unused land to be used, but it can do nothing to encourage land to be used better and its biggest effect may be just a clamour to have some activity – any activity – on these sites to avoid tax.

Related to this, various levels of government currently deploy a bewildering array of planning and building regulations and charges, each of which increases the cost of building. While standards of quality should not be sacrificed for political expediency, many of the regulations – such as minimum sizes – appear to very little connection to quality and instead look like the preferences of planners and policymakers trumping those of households.

How the system currently treats land and planning regulations needs, at the very least, to be streamlined. Overhauling a dated and complicated system of stamp duties, development levies, commercial and industrial rates and amenity contributions, not to mention the Local Property Tax, with a single unified Site Value Tax is clearly the best solution to join up the very disjointed Government system that underpins Ireland’s construction sector.

The Government’s new strategy for the construction sector will be published shortly. No dobut the headline measures will relate to capital, with a fund for construction projects or targets for the pillar banks featuring prominently. But capital is only one part of the puzzle. Labour, land and regulation are just as important. It is to be hoped that the new strategy will contain specific measures to lower the cost of both labour and land, as well as streamline the Byzantine system of planning and building regulations. Only a holistic approach will be good enough if Ireland’s latest housing crisis is to be stopped.