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.