Landlords should be able to “reset” rents between tenancies to stop the exodus of investors from the market and boost the supply of rental property, the Organisation for Economic Co-operation and Development (OECD) has recommended.
Currently the rent pressure zone (RPZ) system in Ireland caps annual rent increases at 2 per cent, or at the rate of inflation, whichever is lower, even if there is a change of tenant.
Industry representatives claim the system is among the most stringent in Europe and one of the reasons for the fall-off in new home building.
In its latest report on Ireland, the OECD said the Government should consider allowing landlords freely adjust rents when there are new residents in a property while maintaining controls during the tenancy.
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Its recommendation comes as the Government reviews the existing RPZ system which is due to expire this year.
“We need to pivot more strongly to getting more private sector investment into the market,” Taoiseach Micheál Martin said earlier this week.
The OECD noted that with higher-than-normal inflation in recent years, the 2 per cent rent cap was likely to have been below the cost of maintenance and upkeep and “might have driven landlords to sell”.
“Continued population growth, including inward migration, will raise demand for rental accommodation in big cities, increasing the need to maintain incentives to have an adequate supply of private rentals,” it said.
In its report, the Paris-based agency cautioned that tax incentives during the property boom created “a misallocation of housing, deadweight losses, and significant fiscal costs”.
It also criticised the Government’s current Help to Buy and First Home schemes, claiming they could be inflationary.
“Such measures in a context of supply-demand imbalances can contribute to demand pressures and translate to higher house prices or rents over the medium term, and be costly and hard to reverse,” it said.
The OECD also warned that the Government’s updated housing targets were still not enough to meet the State’s overall housing need.
While the recent increase in annual housing targets from 33,000 to around 50,000 units per year was welcome, it did not fully reflect the State’s total housing needs because of the “legacy of past under-investment”.
It also claimed that some local authorities were using the targets as ceilings rather than minimum build rates which had the potential to lower supply, particularly in urban areas.
The report comes in the wake of a report by Davy Stockbrokers which claimed the State needed to build 93,000 new homes a year out to 2031 to tackle the housing problem.
The OECD devotes a significant portion of its latest survey on Ireland to housing, noting that strong demand driven by “population growth, past underinvestment and constrained supply” had led to affordability and viability challenges.
And while recent policies have contributed to an increase in housing completions, “supply-demand mismatches persist”.
The OECD also claimed temporary tax measures introduced in recent budgets to address near-term affordability challenges should be phased out.
In particular it highlighted the reintroduction of mortgage interest relief and extension of tax reliefs and credits for landlords and tenants as being “not targeted” and potentially “regressive”.
It also advocated imposing higher taxes on residential dwellings and land as way to reduce the State’s “home ownership bias” while “strengthening incentives to develop land and build”.
On the wider economic outlook, the OECD said activity would remain robust in 2025 and 2026 “as inflationary pressures and financial conditions ease and volatility from the multinational sector subsides”.
It projected the economy would grow by 3.7 per cent this year in GDP (gross domestic product) terms and by 3.5 per cent next year.
However it warned of downside risks in the form of rising geopolitical tensions, trade protectionism and weaker global demand which it said “could weigh on exports”.
The OECD also said temporary tax measures introduced in recent budgets to address affordability challenges should be phased out.
In particular it highlighted the reintroduction of mortgage interest relief and extension of tax reliefs for landlords and tenants, claiming the measures were “not targeted” and could be “regressive”.
“In a context of strong demand due to population growth, past underinvestment and constrained supply have led to affordability and viability challenges,” the OECD said.
“Recent policies have contributed to an increase in housing completions, but supply- demand mismatches persist,” it said.
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