The rental situation is becoming ever more difficult for those looking for somewhere to live, as costs for new rents soar above Celtic Tiger peaks. But how do we judge the overall position of the market, is there a bubble in the rental sector or is this the new reality?
And should the Government become more directly involved or will that just cause more problems?
Below we discuss the key issues in Ireland’s rental market.
1. What is the best measure of rents?
Being able to measure a problem accurately is crucial to being able to address it. Recent headlines have focussed on a Daft.ie survey showing the price of new rental contracts rose 12.4 per cent over the past year and are now some 27 per cent over Celtic Tiger peaks.
Situations differ, but roughly this means an income of €45,000 plus would be required for a married couple to take out the average new rental contract - costing just over €1,300 a month - and stay within normally accepted affordability limits.
For a typical rental property in central or South Dublin costing €2,000 a month, earnings of €80,000 are required.
This is based on paying around 40 per cent of net income in rent - around one third is the normally advised limit, so even 40 per cent is pushing it.
In reality, many people in Ireland are busting through the 40 per cent limit, leaving themselves little to spend elsewhere, apart from essentials and no capacity to save - for example for a deposit on a property to purchase.
However, the Daft.ie figures measure the average level of new rental contracts, taken from the Daft.ie website, so it is a subset of the overall market.
To look at all rents, including existing ones, we need to go the Residential Tenancies Board (RTB) figures, the latest of which are for the first quarter.
This shows a somewhat lower level of rent and a lower rate of increase. This makes sense as – notwithstanding the debate about whether some landlords can get around it – existing tenants are generally protected by the 4 per cent rental cap. The gap between the prices paid by those with existing leases and those taking out new rental contacts is expanding quickly.
Up 7% year-on-year
The RTB figures show average rents nationally at €1,060 per month, up by just over 7 per cent year on year. It estimates average figures for Dublin at €1,527, up 7.7 per cent year on year. Its figures suggest some possible moderation in the rate of increase in average rents early this year.
The swings in new rental levels are larger than those in the market on average. For the Republic as a whole, the RTB index shows rents now 7 per cent above pre-crash peaks, while the Daft.ie Index shows it 27 per cent higher.
Both indices are valid and useful from a policy point of view. The contrast between the two suggests the rental pressure zones are slowing increases for existing tenants and thus slowing the average market rise, though it remains way ahead of inflation. The Daft index shows a rapidly worsening picture for those looking for new rentals.
We are used to the concept of people getting “stuck” in starter homes or apartments from which they intended to trade up. Now they are also getting “stuck” in rental properties, knowing that if they try to trade up to a bigger property they are likely to face a significant price hike. Like a tracker mortgage, a rental lease is now something to be retained.
2.Are rents too high?
When people on average wages can’t afford them, the obvious answer is “yes”. In Dublin, this is now certainly the case in relation to new rents, while prices are also high in central areas of Cork, Limerick and Galway. Affordability is much better in regional areas, though of course this is because of fewer jobs and lower demand.
Typically, a single person would struggle to rent in the centre of major cities internationally, but even for dual-earning many couples renting in Dublin is now becoming a financial stretch, or in some cases simply unaffordable. Lack of supply makes it all the more difficult for renters – and of course is central to rising rents.
Daft.ie figures show just over 3,000 properties nationally were available at the start of this month to rent, slightly up on last year but apart from that the lowest since they started compiling figures in 2006.
Renting is also more expensive than paying a mortgage in many parts of the country – again assuming a property to buy can be found to purchase.
And so-called rental yields – the gross return a landlord can expect on the basis of current prices and new rents – is 7 per cent to 9 per cent or in some cases higher for smaller apartments and properties in many parts of the country, according to Daft.ie.
Various international comparisons, including one done by payment company Worldfirst, show Ireland topping the European league for rental returns, due to the sharp rise in rents since 2016.
International comparison
A range of surveys also shows rents in Dublin are high by international comparison. A Mercer ranking of the cost of living for expatriate workers shows Dublin jumping by 34 places this year to 32nd in a list of more than 200 international cities, with the rise largely due to the jump in rental costs. Dublin was the most expensive euro zone city for expats, it found.
Recruiters say companies looking to invest in Ireland are, in some sectors at least, now having to look outside the Dublin area, as they fear high rental and the lack of availability of properties on the market will make it more difficult to attract staff.
Many of these companies rely not only on Irish employees but also on staff coming from overseas. The latest labour force data showed a near 10 per cent increase in the number of non nationals coming here over the past year, reflecting rising job shortages in some sectors. This will add to rental pressures.
3. What can be done?
It is not a sexy but the underlying, long-term solution to rent pressures and the housing crisis in general is increasing the supply of properties.
There are signs this is starting to happen. Analysts believe around 18,000 houses will be built this year, up more than 25 per cent on last year but still well shy of what is needed - estimated to be at least 35,000 a year.
Worryingly for the rental market, apartment completions are rising much more slowly, up just 3 per cent year on year. According to Dermot O’Leary, chief economist at Goodbody Stockbrokers: “Apartment construction has been delayed due to uncertainty surrounding building regulations.
“This uncertainty has not yet been fully resolved. With Ireland having the lowest share of apartments in its housing stock in the EU, a significant increase in multi-family units are required to both close the supply/demand gap and prevent further urban sprawl.”
Increasing apartment construction, particularly in city centres, is part of the Government's new spatial strategy. Minister for Housing Eoghan Murphy said "compact growth" – high rise developments in city centres – is essential to tackle the housing crisis. The question is whether the public will buy into this and it can be made happen.
The key options for increasing the supply of rental properties are:
1. Encouraging more private building, particularly of apartments: The Government has moved to ease guidelines in areas such as parking provision, though there still seems to be uncertainty about height restrictions on apartment buildings.
Tax incentives are also being discussed. The Government has promised to more than double the vacant site levy to 7 per cent from next year to discourage the hoarding of development land and this is likely to be addressed in the Budget.
IBEC has called for this to be replaced with a new site value tax. There is debate about the cost-effectiveness for the private sector of building apartments, the cost of development land and construction and the viability of a build-to-rent model – where properties are developed with the intention to rent rather than sell – which is seen as vital to increase supply. Big international funds are showing an increasing interest in investing in apartment blocks for rental here, though naturally they will seek the highest possible rental return.
2. Encouraging more supply of existing properties for rental: The Government has promised to introduce some kind of regulation or licensing of short-term renting – such as via Airbnb – as this is taking supply out of the rental market. Some cities such as Berlin and Amsterdam limit the amount of time for which properties can be rented on such short-term arrangements.
One problem has been the withdrawal of properties from rental as many landlords leave the sector. Property agents and landlords have said that increasing regulation, the 4 per cent cap on rent increases in many areas, higher personal taxes, the property tax and cuts in mortgage interest relief have driven many out of the sector. However, rising rents might be expected to counteract this, to some extent at least. The role of the 4 per cent gap in annual increases in so-called rental pressure zones is a particularly controversial issues, with landlords arguing that those with existing tenants are now at a huge disadvantage to new landlords .
3. More State intervention: The supply of rental properties by the private sector looks unlikely to meet demand for many years to come. This is leading to increased study of how public policy can boost supply. One obvious method is through more social housing, which is happening, though in some cases via renting of homes from private landlords.
However the Government has said it is examining a so-called "cost rental" model, proposed here in a major report by the National Economic and Social Council four years ago and common in other European markets.
This involves schemes in which properties are rented out at a price to reflect the cost of development – rather than to maximise profits.
Families who cannot afford to pay would be given some support, as they are at present with market rents. These schemes involve public funds to support or incentivise the provision of the properties involved, often in partnership with private builders.
The concept is that the rental funds are then used to support the development and provision of further properties. These homes are seen as particularly suitable for the group of people who do not qualify for social housing but cannot afford current rental prices.
Moving in this direction would be a major departure from the model of relying of private rental provision. However given the huge problems facing the market, there is now considerable support for this concept, which has won the backing of some local authorities and is being examined by the Government as part of the remit of the planned new National Regeneration and Development Agency.
This agency is to use State lands to try to help tackle the housing crisis. The Green Party has tabled a bill calling for the immediate classification of two sites to develop as part of a test-bed for the cost rental concept.
The bottom line
The bottom line is the lack of supply in the rental market looks set to persist, with rising employment and immigration keeping prices under upward pressure. This will keep the Government under the cosh on the issue.
The key issue is how far the current administration is willing to push public intervention, with signs that the private sector response will not, in its own , tackle the crisis.
With Fianna Fáil also pushing on housing, it looks like the October Budget will signal a major increase in direct Government action.
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