Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Why Rent Pressure Zones can’t work

Earlier this week, the latest Daft.ie Rental Report confirmed that the streak of rising rents continues. In Dublin, rents have now risen for 23 consecutive quarters – nearly six years – and have risen a total of 66% since 2011. Outside Dublin, the increase has been somewhat smaller (40%) and shorter (17 quarters), but the trend is now common across the whole country.

It is important to put those trends in context. Adjusting for general inflation, the longest streak of rising rents that I can find in the post-World War II era in Ireland is at the start of the Celtic Tiger. Rents in Dublin rose by more than 100% in real terms in the seven years between 1995 and 2002. It is now looking likely that, in length if not in the size of the increase, that record will be broken in the very near future.

Ultimately, rents are rising because of the chronic mismatch between strong demand and weak supply. The country needs at least 15,000 and probably closer to 20,000 new rental homes built each year. But currently almost no new rental homes are being built.

The majority of new “completions” each year are either one-off homes (which never come on the market, sales or rental) or properties built during the bubble being inhabited for the first time now. And the bulk of the remaining new homes – perhaps no more than 3,000 in 2016 – are houses built in estates for sale, not apartments and not for rent.

In this kind of market, a system like Rent Pressure Zones could never work. Put yourself in the shoes of a landlord in the current market. You put up a home for rent in a Rent Pressure Zone, for €1,000 per month. You are inundated with enquiries and arrange for an open viewing. Thirty interested parties turn up.

The first prospective tenant says they are interested in the property. Fully aware of their rights, they ask for proof that the €1,000 a month rent is no more than 4% than the rent charged to the previous tenant a year ago. The landlord, new to this Rent Pressure Zone thing, says “OK, well, let me get through this and I’ll get back to you on that.”

Next in the queue says “Look, I don’t really care who was here a year ago or what they paid. I need somewhere to live and I can pay €1,000. I’ll pay €1,050 if needs be.” Who is the landlord going to go with, even with the best of intentions?

Rent Pressure Zones were introduced because rents were rising due a scarcity of supply. But they can never work for precisely the same reason: where tenants have no bargaining power, they are not going to police rent increases.

This is certainly true for new tenants. What is less clear is what has happened rents for sitting tenants. The headline indices of rents – both in the Daft.ie Report and in the RTB’s reports – measure rents for new lease. Until now, neither has been able to say anything about how often and how much rents are increases within a lease.

For this week’s Daft.ie Report, we organised a survey of over 4,000 tenants, asking them the path of rents they have paid in recent years. The findings are noteworthy: “sitting rents” have increased by an average of just 27% in the last five years, compared to over 50% for “market rents”.

This is even more damaging for the Rent Pressure Zones. Not only are they most unlikely to work, it seems that their prime beneficiaries – sitting tenants, who know exactly what the rent was a year ago – are the renters least in need of protection.

Indeed, if rents of sitting tenants were measured accurately, it may be the case that nowhere in the country is a Rent Pressure Zone currently.

Ultimately, the whole system of Rent Pressure Zones was based on a poor understanding of the housing system. It was the equivalent of a Minister for Health banning high human body temperatures, because of the danger they pose to our health.

The level of rents is effectively the temperature of the market. If you don’t like the symptoms, you can’t simply ban them. You have to tackle the underlying disease. The disease here is a lack of rental homes, in particular apartments, due to high construction costs. That is what policy should focus on.

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An edited version of this post was originally published in my column in the Sunday Independent.

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