The news that rents are climbing at their fastest rate in 20 years and have passed €2,000 a month nationally should, in theory, put the kibosh on any plans to lift the cap on rents that applies in pretty much every urban area of the State.
The Government has been trailing the idea since the last election, based on the premise that it will kick-start development, particularly the sort of large apartment schemes considered crucial to making a dent in the housing shortage.
Even allowing for the fact that the figure of €2,000 per month contained in the Daft quarterly rental report is asking rents – for properties that are coming to market, including new builds exempt from the rent cap – the lifting of the cap now looks like a non-starter politically.
The construction industry argues, rather counterintuitively, that ever-rising rents simply bolster their argument for doing away with the cap
The true picture may be somewhat different. According to the most recent report from the Residential Tenancy Board, the average rent for new tenancies nationally rose by 5.5 per cent year-on-year to €1,680 in the fourth quarter of 2024. It rose by 4.6 per cent year-on-year for existing tenancies nationally to €1,440.
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This is a moderation in the rate of rental inflation, it argues, but the problem for the Government is that the figure that matters is in the Daft figure as that is the one the Opposition will use to beat them up in the Dáil should they lift the cap and expose sitting tenants to significant increases.
The construction industry argues, rather counterintuitively, that ever-rising rents simply bolster their argument for doing away with the cap. They are right up to a point. The reason rents are rising is because there is insufficient supply. The number of new homes commenced so far this year is eight times lower than the comparable period last year and at its lowest since 2016, according to the Department of Housing.
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According to the industry a negative feedback loop has set in. Rent caps are discouraging investors and developers from building apartments and houses for rent and this is squeezing supply, which in turn is pushing up rents to record levels. The solution, they argue, is to remove rent caps and allow rents to move until such time as a positive feedback loop sets in.
Leaving aside the possibility that capitalism is broken beyond repair, there is no doubt that the Government is in a very tricky place
Of course, it won’t work that way – not in the short term at least – and actively encouraging such an inflationary cycle brings us one step closer to the sort of housing market crash that some think is the only way out of the current mess.
Leaving aside the possibility that capitalism is broken beyond repair, there is no doubt that the Government is in a very tricky place.
The main argument for lifting rent caps – made by everyone from Taoiseach Micheál Martin downwards – is to encourage international investors into the market. Again, the argument is correct up to a point. If you want to get the sort of investment funds that are funding large developments here to invest more in the Republic, you have to offer them a better return than they can get from investing elsewhere in other assets. That means higher rents.
The societal and political costs of lifting the rent cap have to be considered
There does, however, come a point when the returns these funds are looking for are so expensive to the State that other sources of capital become more attractive. And this is where we find ourselves.
The cost of getting money from these funds goes beyond allowing them to make large profits by charging high rents. The societal and political costs of lifting the rent cap have to be considered.
The main one is the possibility of a political upheaval driven by the rise in prices and rent that will occur before the predicted moderation in rents kicks in, assuming it ever does. There is also the possibility of some sort of crash.
The thing to remember about crashes is that most people don’t see them coming, or else there would not be crashes.
The Government would argue that it has other tools it can use to bring down the costs of construction, which in turn, should allow investors to get the returns they seek without a jump in prices.
It may look like international investors have a gun to the Government’s head. But that is always the wrong time to make a deal, particularly when you have the best part of €15bn in rainy day funds
There are two problems here. The first is that progress in areas such as planning reform is just too slow and there is no real reason to believe that this will change. The second is that the world doesn’t work that way. Investors will bank any savings rather than pass them on to tenants.
Lifting the rent cap to encourage international investment is arguably the biggest gamble this Government will take. The potential for it to blow up in their faces is significant.
It may look like international investors have a gun to the Government’s head. But that is always the wrong time to make a deal, particularly when you have the best part of €15 billion sitting in rainy day funds.
It’s time to look out the window ... the rain is pouring down.
