Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

November 2018

Is there any hope for Rent Pressure Zones?

The figures from the latest Rental Report earlier this week confirm the growing divide between the fortunes of the country’s sale and rental markets. In the sale market, new construction is starting to bear fruit. The additional supply, together with Central Bank rules that link sale prices to the real economy, is leading to a slowdown in inflation in the sale segment.

In the rental market, no such relief is being seen. Availability on the market is tighter now than at any point over the past decade. While availability is up slightly in Dublin compared to a year ago, both levels are well below anything like normality.

The evidence of the past decade suggests that Dublin needs at least 4,000 rental homes on the market for there to be enough choice among tenants that rents are pushed up. Currently in the capital, there are fewer than 1,500 homes to rent. This is a situation mirrored in other cities and indeed now countrywide.

In fact, that figure – 1,500 available when the city needs 4,000 – almost certainly understates the problem. The reason is that the rental sector now is so much more important than in the 2000s. In the 2016 Census, there were twice as many households in the private rental sector as in 2006 in Dublin – with even more growth in renting elsewhere in the country.

So, while 4,000 homes on the rental market may have been enough when Dublin was home to 60,000 renting households, that is unlikely to be enough when the city has 120,000 renting households.

The same holds true for the rest of the country – especially the four other major cities. Across Cork, Galway, Limerick and Galway cities combined, there were fewer than 250 rental properties on the market on November 1st. For urban areas with a combined population of almost half a million people, that is an astonishingly small number.

A shortage of rental homes did not emerge overnight. It was clear that this was an emerging issue as early as late 2009 in Dublin. Yet for a long time, policymakers did nothing as their primary focus when considering housing was on legacy problems of excess – such as ghost estates, negative equity and mortgage arrears – rather than on forward-looking problems of scarcity.

When a response came, it came not in the form of boosting rental supply, rather in the form of controlling rental prices. It may be tempting to think of Rent Pressure Zones as the rental segment’s equivalent of Central Bank rules on mortgages. However, the Central Bank rules are there to ensure that sale prices remain linked to fundamentals, rather than driven by credit or expectations.

In contrast, Rent Pressure Zone rules are an attempt to hide fundamentals. Remember, increasing prices are just a signal that there is more demand than supply. In a healthy market, that signal draws out new supply, driving prices back down.

But the nearly doubling of rents in Dublin has had almost no effect in drawing out new rental supply. The implication for policymakers should be obvious: tackle the underlying causes, not the symptoms.

Does that mean that Rent Pressure Zones should be scrapped? Many economies have perfectly healthy rental sectors and also have controls on rental inflation. Ireland could be one of those. However, rent inflation controls are, typically, the final element in those healthy housing systems, not the foundation.

In rental systems with an adequate supply of all the kinds of homes a diverse society needs, rent inflation controls act as a check on bargaining power within a lease. They are not a substitute for a prospective tenant’s lack of bargaining power in trying to find a lease.

I am ambivalent about whether Rent Pressure Zones should stay or go. Given inflation for new leases has been higher in the two years since they’ve come in than in the previous two years, it doesn’t seem like there’s much to keep.

But one key element could at least help rebalance the scales a little in a renter’s favour. That is the publication of a Rent Register, the counterpart to the Property Price Register. The PPR can never overturn the dynamic in the market – but it does give a prospective buyer peace of mind.

A Rent Register could do the same – with or without Rent Pressure Zones. No doubt there will be those who argue that this is violation of people’s privacy. That was argued before the PPR was published.

But ultimately, we live in a society where we share certain things for the greater good. While the rental sector waits for policymakers to fix rental supply, knowing what renters pay belongs in that category.

Light at the end of the tunnel

As the year has progressed, the story of the property market has evolved. This time last year, the easiest way to summarize the Irish housing market – across sale and rental segments, in Dublin and elsewhere – was one of chronic shortages pushing of prices across the board.

With 2019 drawing near, though, the story is evolving. It remains far from a healthy market – but the uniform description of the market no longer seems to apply. In particular, the sales market is starting to show some signs of normality.

Given it’s so long since we had anything resembling normality, perhaps it is no harm to set out what that might look like. In a healthy housing system, new housing supply comes on stream to meet new demand. That should hold true for all types and tenures of housing: owner-occupied, market rental and social housing.

It is also a point that needs to hold in times of growth, not times of decline. Suppose housing demand goes down – for example due to unemployment or emigration. Then, because the existing stock of housing is fixed, all society needs to do is sit tight, build less and wait for things to come back into balance while enjoying cheaper housing.

There is no such opportunity in times of growth. Every year of under-provision of new housing means that it becomes more and more expensive relative to everything else in the economy. Over the past five years, there has been effectively no increase in general prices – but rents have almost doubled in Dublin while the increase in sale prices has been almost as large.

The parallel paths of sale and rental markets, though, appears to be at an end. Annual inflation in the sales market was below 6% in the middle of the year, down from 12% a year previously and below the inflation figures for 2014, 2015 and 2016 to boot.

Meanwhile, in the rental segment, rental inflation if anything is getting worse. As of mid-year, rental inflation nationwide stood at 12.4%, up slightly from 11.8% in 2017 and also above figures for 2013-2016, which range from 6% to 11%.

The answer to why sale and rental segments are diverging lies in supply. Whereas the volume of sale listings has improved significantly over the past 18 months, no such improvement has occurred in the rental market.

In the first half of 2018, there were on average fewer than 1,400 properties available to rent at any one time in Dublin. That’s 100 fewer than in the same period in 2017 and one-fifth of the level of availability seen in 2009. My estimate is that Dublin needs at least 5,000 properties put up to rent every month and it is currently well below half that.

For the sale segment, however, steadily increasing numbers of properties are available to buy. In mid-2018, there were almost 5,000 properties for sale in Dublin – up almost 50% in just 12 months. The improvement in availability in Dublin is starting to spread, with increased stock on the market in Leinster (outside Dublin) and most recently in the other major cities.

These differences in availability reflect differences in construction. Over 7,200 estate houses were completed in the Greater Dublin Area, Cork and Galway in the year to mid-2018. This is 2,500 more than were completed in the preceding year, or over 200 extra new houses each month.

In a market that is currently processing perhaps 4,500 transactions every month, an extra 200 estate houses – while hardly game-changing – is certainly not insignificant. Contrast this with the construction of new apartments, where just 2,000 were completed in the same period, up less than 700.

An extra 50 rental properties per month – and even then that is assuming that apartments are being built for rent, not sale – is simply far too small to make even a small dent in the supply-demand imbalance in Ireland’s rental sector currently.

We can see somewhat into the future by looking at planning permissions. Based on what’s happened over the past few years, planning permissions for estate houses typically take six quarters to convert into homes that are completed. For apartments, the lag appears to be longer – more like ten quarters – but also weaker, especially as apartments are an ‘all or nothing’ completion. (No apartment is ready until they all are.)

Those lags mean that we can look at planning permissions registered this year and have some reasonable expectation of completions in 2019 and even into 2020 for apartments. We are likely to see over 13,000 estate houses completed next year – up from 10,000 this year. That increase will further cool off the sales market, by bringing into balance supply and demand.

However, the picture remains bleak for the rental segment. We are likely to see just 4,200 apartments built next year. While that’s an increase on 3,000 this year, it is important to note that many new apartment complexes are aimed at downsizers in affluent areas.

While all supply is welcome – tempting wealthy empty-nesters out of larger dwellings will free them up for families – the signals from the housing market are that the split between a steadily improving sales segment and a rental segment bereft of supply will persist over coming years.