Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

February 2017

Are tracker mortgages haunting Ireland’s mortgage market?

Why are mortgage interest rates in Ireland so high compared to other countries? The ECB collects information on the average interest rate of a new mortgage for all euro countries and, for December 2016, the average for the euro area was less than 1.8%. In France, it was 1.5% and in Finland it was just 1.1%. In Ireland, however, it was 3.2%, the most expensive of the 19 countries covered, quite a bit above the next most expensive countries, Cyprus (3%) and Greece (2.9%).

At one level, this seems to be nit-picking. Compared to the bad old days like the early 1980s, when mortgage interest rates were almost 20%, is there that much of a difference between 3.2% and 1.2%? Perhaps more importantly, is an average of less than 2% sustainable? If growth were to pick up in Europe – as has been happening over the last year or so – then the pressure would be on for the ECB to normalise its own rates, with knock-on effects in markets such as Finland and France.

Nonetheless, the “Programme for a Partnership Government” last May included a commitment to examine the structure of the market for mortgages in Ireland and see if there were policy options available to bring the cost of mortgages down. This week, the Competition & Consumer Protection Commission – the amalgam of the Competition Authority and the National Consumer Agency – launched a consultation on this topic, as its analysis starts. I have no doubt that there are many issues which will affect the cost of mortgage credit at the margin. This includes Ireland’s small market size, which may deter international banks from entering. This may also include regulations, which – for example – prevent credit unions from lending more than a certain fraction of their capital for more than ten years.

However, I suspect that deep down, the problem lies with the legacy of the bubble and, going deeper, Ireland’s predilection for variable, rather than fixed, rate mortgages. To explain, it wasn’t always the case that Ireland was an expensive place to borrow. The ECB figures go back to 2003 and for much of 2003, 2004 and 2005, Ireland was one of the cheapest places to borrow. And therein may lie the rub.

Ireland’s mortgage market is skewed towards variable rate mortgages and in the bubble, these were trackers. Irish banks fixed the margin that borrowers would pay above the ECB rate, for the lifetime of the mortgage. They then gambled – in spectacularly unsuccessful fashion – that they would be able to roll over their own debt at a cost close to the ECB rate. Of course, when the so-called “Great Moderation” came to an end, and the “Great Recession” started, Irish banks suddenly found that borrowing short to lend long was a recipe for wipe-out.

But the trackers that helped to destroy them still exist. So, with ECB rates currently at 0% (yes, zero!), there are plenty of Irish households who borrowed in the bubble who are paying 1% or less interest. Irish banks, however, struggle to borrow themselves at such low rates and cover costs associated with being a financial intermediary. And if their own lenders aren’t subsidising legacy trackers, there is only one other group that could: new borrowers. The reason Irish borrowing is expensive now is precisely because it was so cheap ten years ago.

Rolling the clock forward, bubble-era trackers will continue to exist right through the 2020s and into the 2030s. Bizarrely, an ECB president in 2035 will still be able to financially affect Irish households for decisions they made in 2005. A PhD in Economics is not required to see that this is hardly ideal.

In most other high-income countries, the typical mortgage product is a fixed rate mortgage. In Denmark, for example, Danish banks are required to borrow for as long as they lend. This turns them into warehouses, breaking up the journey from international capital markets to the individual borrower. Households borrow for rates that are fixed for the term. The best banks are those than can add on the slimmest margins.

This is hopefully where the CCPC’s study will take it. A good rule of thumb is that when Ireland sticks out in a graph, find out if it’s a good thing or a bad thing and then find out why. The answer might not be popular or a simple fix. But it’s better to be right than to make things worse by applying a quick fix.


This is a version of a piece that originally appeared in the Sunday Independent.

Will Rent Pressure Zones worsen the rental market logjam?

A point I’ve made a number of times before is that turnover in the residential sales market is a key measure of the health of the housing market. At one point, in the depths of the crash, the typical property in Connacht was changing hands roughly once every 100 years – which we know is far too long and thus the market was unhealthy. The same metric can be used to examine the rental market, particularly in light of the figures this week that rental inflation continues to climb, pushing average monthly rents to fresh new highs. Unfortunately, we don’t yet have the full figures from the 2016 Census but we can at least give a rough picture of turnover in the rental market.

For example, in 2006, there were about 145,000 homes in the country in the private rented sector. That year, just under 80,000 rental properties were listed on, suggesting that the typical property changed hands slightly more often than once every two years. In Dublin, indeed, the typical rented home came back on the market after 18 months. By 2011, this had slowed down a little, and of the 300,000 or so private rented homes in the country, just under half were listed on the market that year. In both Dublin and in the country at large, the typical lease length was two years. What is interesting is that, despite the huge growth in the sector – the number of private rented homes more than doubled in just five years – the turnover was similar.

It is likely that when the figures for 2016 come out, they will show that the private rented sector has not shrunk since 2011. So in other words, we are still looking at a sector with at least 300,000 homes in it – and possible more. Even if it were just 300,000, though, what has changed dramatically is the fraction that comes on the market every year. In 2016, there were less than 70,000 rental listings nationwide. What this means is that fewer than a quarter of rental homes came on the market. Flipping that stat around, the average lease length is now more than four years, having been two years in length as recently as 2011.

On the face of it, this may seem like good news: Ireland is becoming a nation of long-term renters. This is the benign interpretation. There is nothing at all wrong with people renting for longer (As long as they are also putting money away for their futures). However, the figures are also consistent with logjam in the market.

It is reasonable to think that the typical landlord in Ireland does not fully review the rent as often as they are legally allowed. What this means is that many tenants in Ireland enjoy below market rents. This creates an incentive to stay put, even if in other circumstances you might have moved. So when a group of students goes away for the summer, they may keep paying rent, so as not to “lose their place”. Or where a group of young professionals are sharing a house, this group may keep rotating, despite couples being formed or people change jobs.

This has become a much more pressing concern, now that Ireland has moved from a “rent resets when empty” model to system where whatever level of rents held in late 2016 is now frozen in, for at least a few years. The Rent Pressure Zones risk creating – or re-creating, for those with long enough memories in the Irish rental market – a two-tier rental market. This would be the case even if the entire country were deemed a Rent Pressure Zone (as increasingly seems likely, given the figures in this week’s Daft Report).

On one tier are those properties whose rents were increased steadily by landlords throughout the period 2011-2016. These are effectively market rents, albeit from now on the increases will be slightly capped. The other tier consists of those properties whose rents were not increased by landlords during the same few years, believing that they would get the chance to in the near future, once their tenant ultimately moved on. But the act of bringing in Rent Pressure Zones itself has made moving on less likely: why give up a low level of rent?

Not only that, when they do ultimately move on – for example, if they are buying a home to live in – tenant and landlord are likely to cooperate and find a new tenant through word of mouth. What landlord wants the hassle of 200 people turning up to view something that’s being rented at 40% below market rates?

Again, word-of-mouth may sound benign, but those who lose out will disproportionately be those on lower incomes, on some form of State support, or who have just moved to the country. Like many other aspects of life in Ireland, the dice in the rental market have just been loaded in favour of insiders.


This is a version of a piece that originally appeared in the Sunday Independent.

Nasty Nick and Decent Dave: how do you measure a problem like rental inflation?

Late last year, new measures were announced to try to limit rent increases, primarily to give tenants – and the Government – some breathing space while issues inhibiting the supply of new homes are addressed. On the face of it, the measures were straightforward: in any area where rental inflation is above 7% for a year and a half, rent increases are now capped at 4% per annum.

There was a bit of a kerfuffle in the first few days, when there was confusion about the formula used to define 4% per annum. And there continues to be political football played with which areas were to be granted ‘Rent Pressure Zone’ status immediately.

Of course, when something becomes legislation, nothing is ever straightforward. What does “area” mean, for example? In everyday conversation, it is fine to talk about Dublin rents increasing by a certain fraction and to include Bray and Greystones in that definition of Dublin, but it an entirely different thing if the law has designated Dublin a rent pressure zone but not Wicklow.

Even if we were clear on what each area meant, things remain less than ideal. What if the Galway market is starved of apartments but has enough family homes? Rental inflation for apartments in Galway could be well above 7% but for houses it might be close to zero. Can rent pressure zones distinguish between the two markets in the same location?

But whatever about these technical worries, there are two more fundamental problems that threaten to undermine the system of Rent Pressure Zones just as it gets underway. The first is that it effectively attempts to control the price of apples while measuring the price of oranges. The motivation for this measure is to protect sitting tenants. However, rent inflation is benchmarked not against rents paid within leases, i.e. by sitting tenants. The RTB measures rents and rent inflation by looking at rents paid by new tenants. These are completely different beasts.

Secondly, what makes this policy such a substantial change from previous policy around rent control is the fact that it applies across tenancies as well as within tenancies. It has been standard, for more than a decade, that while landlords are limited in their ability to increase rents for sitting tenants, when those tenants move on, the rent can effectively ‘reset’ to the market level. This new system shatters that link.

The end result of both these features is best described by the parable of Nasty Nick and Decent Dave. Nick and Dave both own adjoining semi-detached properties as investments and rented them out in 2010 for €1,000 per month. Dave, being a decent bloke, has gone easy on his tenant – a family with young children – and only increased the rent twice in the following six years. The family now pay €1,200 a month for their home.

Meanwhile, Nick, being a different sort of character altogether, has increased the rent as often as the law allowed. The family living there in 2010 are long gone, priced out and living somewhere further out but more affordable. In their stead are four young professionals, who collectively pay €1,700 a month for the house.

Nick’s property, having been on the market a few times since 2010, is what is used to measure rent inflation. Dave’s should enter the calculations for cost of living – after all, his tenants are people too – but the way rents are measured in Ireland currently, the stable rent he offers is not reflected at all in the headline measures.

And the worse the situation gets on the open market, the more tenants in situations like Dave’s are going to stay in their home and enjoy their below-market rent under the radar. This means that, while it may have been the case 15 years ago that the typical rented property changed hands every 12-18 months, many renters are now staying put for 3-5 years. In other words, the more measured inflation in rents goes higher, the greater the pressure to stay put – exacerbating the problem with measured inflation.

It gets worse. Suppose the family living in Dave’s house are moving out to buy their own home. One of the reasons Dave was so lenient with his tenants was that he knew, once they were gone, he would be back to the market rent. This has now been taken away from him. Even though his tenants have moved on, and even though his next-door neighbour is charging a rent €500 more than he is for the same property, the most he charge his new tenants is 4% a year more.

We should not be surprised, then, if Dave decides to sell up. The problem is that, if he sells to another investor, they face the same level of rental income as Dave does. The new system of Rent Pressure Zones has effectively devalued Dave’s investment… unless he sells to an owner-occupier.

Now that Rent Pressure Zones have been introduced, there is likely to be a silent exit from the market of landlords who were muddling through and who thought they were doing the right thing by being nice to their tenants. If they stay in the market, their asset is devalued, so they have a strong incentive to leave by selling to an owner-occupier.

If Rent Pressure Zones are here to stay, the first step in addressing these problems is to better measure rent inflation, by reflecting not only “between lease” rent inflation in the headline stats but also “within lease” inflation. We should not be surprised if this dramatically changes our picture of what has been happening renters since 2011.


A version of this article appeared in the Sunday Independent Property Section on February 12th, 2017.

Would you rather be fat or tall? Time for Dublin to grow up

The figures from this latest Rental Report make grim reading not only for tenants but for policymakers also. The annual rate of rental inflation – at 13.5% in the final quarter of 2016 – was the highest in the history of the Report, which extends back to 2002. The rate of inflation in rents is high across the country, with only Connacht seeing inflation of less than 10% currently, of all the major regions. (Its rate of inflation is 8.9%.)

Indeed, in 45 of the 54 sub-markets analysed, there is double-digit inflation in rents currently. In Dublin, rents are now rising by almost 15% a year, the highest since the middle of 2014. It means that rents in the capital are now up almost 65% from their lowest point in 2010 and are a full 14% higher than their previous peak at the start of 2008. In the four other cities, inflation has eased back somewhat in recent months but remains between 10% and 13%.

Unsurprisingly, the issue is a severe imbalance between supply and demand. Fewer than 4,000 homes were available to rent across the country on February 1st. While this marks a 10% increase on the same figure a year previously, it is still well below the lowest point for availability during the Celtic Tiger. Then, stock on the market reached its lowest point in April 2007, when slightly fewer than 4,400 homes were available to rent nationwide.

The crucial difference between 2007 and 2017, however, is the size of the renting population. We won’t know for another couple of months how many households in Ireland rented at the time of the 2016 Census, but it is unlikely that the number then is less than the number in 2011. At the time of the 2011 Census, roughly 475,000 households lived in rented accommodation, just under 30% of the total. In 2006, there were just 145,000 households in the private rented sector, together with a further 155,000 in the social rented sector.

It is likely that much of the growth of roughly 150,000 extra renting households between 2006 and 2011 was the private rented sector, given the limited social housing available in recent years. Thus, the private rented sector doubled in just five years – and may have increased further since. And yet, instead of availability doubling, it has fallen, even compared to the worst days of the Celtic Tiger. And in Dublin, the problem is most acute.

Recently, the Government launched a consultation period for its National Planning Framework. This will be the successor to the National Spatial Strategy, which aimed to develop a system of gateway towns and hub towns around the country. Much of the media discussion around the launch focused on the idea of Dublin “eating up” the country and how policymakers should focus instead on ‘balanced regional development’.

While policy can help a city thrive, it is foolish to think that politicians have control over the economic forces at work in determining city size. Indeed, one of the most remarkable laws in economic geography is known as Zipf’s Law. It states that the biggest city in an economy is on average twice as big as the second biggest city, three times as big as the third biggest, and so on. This is true more or less all over the world, with – if anything – the world’s largest cities being too small, rather than too big.

Some respond to this with “Ireland is different”. In some ways, it is. Dublin is more than twice as big as Cork. But the same holds true for Vienna in Austria and Budapest in Hungary. What all these countries have in common is that their current borders do not match their past ones. The island of Ireland is a much more natural economic unit than the Republic and the North are individually. And sure enough, once Belfast and Derry are included, Zipf’s Law starts to look like a much better description of Irish cities.

What does this have to do with policy? It means that population is not a game of redistribution. Trying to redirect people from Dublin to other cities in Ireland merely stunts the growth of the country as a whole. If you want to stimulate growth in the fifth, fifteenth and fiftieth biggest cities in your country, you should encourage growth in your largest, not try to stop it.

This does not mean, of course, that sprawl should be ignored. There is absolutely no reason for Dublin to take up nearly as much space as it does. Greater Tokyo, with a population of over 27 million people, fits into 9,000 square kilometres. Greater Dublin, with a population of less than 2 million people, takes up almost 6,000 square kilometres.

Dublin can drive population growth across the country without “eating up” the countryside. For this, though, three things need to happen. Firstly, Dublin needs to be allowed to grow up. Height limits of between four and six storeys in one of Europe’s fastest growing cities merely translate into lost jobs and higher rents. After all, why be fat when you can be tall?

Secondly, homes need to be built on brownfield, as well as greenfield, sites. Looking around Dublin, it is littered with grossly underemployed land, in the form of army barracks, golf clubs and bus depots, built on the fringes of the city in the past but now in prime central locations. A land tax would help achieve this reuse of our scarce and valuable urban land.

But, even if these regulatory changes were brought in overnight, we still would not see the apartments being built that are needed to stem rental inflation. And the main reason for that is the extremely high cost of construction in Ireland, compared to other high-income countries. An audit has been promised – let’s hope it delivers.


A version of this appeared as the commentary to the 2016Q4 Rental Report, released on February 14th, 2017.

How to build enough homes

6,200 newly built homes were sold in Ireland last year, an increase of almost 100 on the total for 2015, and twice the number of new home sales seen in 2011, 2012 and 2013. Given the early part of 2015 was period of significant activity – as borrowers rushed to use their mortgage approvals from before the Central Bank rules – the fact that volumes increased again in 2016 can only be viewed as a good thing.

So far, so good. However, the bulk of what is being built still does not come on to the market. When the final figures come in, it is likely that 2016 will have seen 15,000 new dwellings completed. Thus out of every ten dwellings built, only four ever come on the market – the other six are self-builds. Indeed, of the 80,000 new dwellings completed since the start of 2010, just 32,000 have come on the market.

This huge gap is not normal – in most countries, the bulk of new homes built would be for the market, rather than self-build. It reflects a long-standing problem with land usage in Ireland. Those building for themselves often do so on family land, which is free, or else as one-offs on cheap land far away from urban centres. Such building imposes huge costs on the rest of society, with knock-on effects for services, such as healthcare and broadband, which rely on density to be cheap.

Overcoming this problem will require a fundamental rethink about how we use land in Ireland. One aspect of this is about regional development. A narrative has emerged that “Dublin is too big”. This misses the point completely that in any economy, and certainly in an economy the size of Ireland, leading cities determine the size of the rest of the economy: in simple terms, if we want our fifth, fifteenth and fiftieth biggest cities to be bigger, we need our biggest city to be bigger. This is not something we get to choose – these are the laws of economic geography.

In addition to rethinking the role of our cities, we also need bottom-up measures that encourage far better use of land. As I’ve written previously in this column, our cities and towns are riddled with “last use” rather than “best use” examples of land usage, with army barracks, industrial estates and bus depots taking up sites that would be far better used for residential or commercial purposes. To encourage public and private organisations to use land better, we need to introduce a land tax – a measure that would also penalise speculation, land hoarding and cynical vacancies.

But that is only part of the problem. A far bigger part of the problem is not that there are 9,000 self-builds but that there are only 6,000 dwellings built for sale. In a country growing as rapidly as Ireland, between 40,000 and 50,000 new homes are needed each year. Allowing 10,000 of those to be self-builds, this means that construction of homes for sale needs to be roughly five times the size it is now.

And that huge gap between what is needed and what is happening is due largely to the high level of construction costs in Ireland. This refers to hard costs, so issues around profit margins, VAT and site costs are contributing to this. Experts say that it costs roughly 50% more to build a home of 100 square metres in Ireland than in other parts of Europe. This is the nub of the problem.

The second half of 2016 saw two important changes to the housing market. Firstly, first-time buyers of newly built homes were given access in the budget to their past income tax, of up to €20,000, to lower the deposit needed. Secondly, that minimum deposit requirement for first-time buyers was lowered even further by the Central Bank. These measures will boost prices and, in so doing, the argument goes, stimulate new supply.

Unfortunately, such measures do not address the underlying problem in the new home segment today. Ireland – with its rapidly declining average household size – desperately needs new homes other than three- and four-bedroom semi-detached houses in estates. It needs student bedrooms near universities, central apartments in high-rise blocks for young professionals, and suburban mid-rise apartments for well-to-do downsizers, as well as many more types of home.

Until the high cost of building in Ireland is addressed, though, we are likely to see only baby steps towards a sector building at least 40,000 dwellings per year. The Minister for Housing announced an audit of construction costs in Ireland, compared to its peers, last October. The results of that study can’t come soon enough!


A version of this appeared in the Sunday Independent Property Section on February 6th, 2017.