There is no doubt that 2016 will be remembered as a turning point for the residential property market. Ten years after the crash began, the announcement of the Government’s Action Plan for Housing and Homelessness this summer provided a vision for housing, together with a clear strategy on how that vision will be achieved.
The combination of this strategy, the revised macro-prudential policy on lending and the initiative for first-time buyers will all serve to assist the market in its recovery.
As a result of the actions by the Government and the Central Bank we should see an uplift in construction in the months and years ahead. This was the good news from 2016.
And it didn’t happen a day too soon. Our latest estimates suggest that given the increase in our population in the past five years, and its forecasted growth in the next 10 years, we need to be building some 35,000 residential units per annum to meet demand. This is over 20,000 more than we achieved in 2016, so it is no small feat.
However, despite the considerable progress made to restore confidence in the construction sector, the announcement of the Government’s plan for the rental sector this month was very disappointing.
To put the measures in context, it is important to understand that investor activity levels have remained stubbornly low throughout the recovery. In conjunction with this, a high proportion of sales were investors exiting the rental market. The result was a significant loss of available buy-to-let product, with a resultant rapid increase in rents.
Imbalance
Current market conditions are a direct response to inadequate supply levels and yet the Government’s plan does not address this imbalance at all in the short term.
Instead it focussed on capping rental inflation to 4 per cent in key urban areas. This was disappointing, but the debate which followed was nothing short of farcical.
The fact that political parties chose to debate whether the rental cap should be at 4 per cent or lower for days served to illustrate that they had completely missed the point.
Rents are too high, tenants do not have any options and landlords are choosing to leave the market in their thousands. Surely this is worth a greater level of consideration and debate.
During the discussion on rental caps much was said about the "fact" that Ireland had high yields for rental properties. What was not said was that gross yields are irrelevant. You can't bank a gross yield. Rather you must pay your mortgage and pay tax, together with a myriad of other charges. In reality, when all outgoings are taken into consideration landlords are receiving net yields of less than 2 per cent.
Furthermore, it is worth noting that the Government receives a very high proportion of all rent paid by tenants.
Net yield
If one takes the example of a two-bed apartment in the central business district of Dublin with a 70 per cent loan-to-value mortgage. Based on current capital values, rental levels and taking into consideration all expenses, the current net yield is 1.76 per cent.
In this example the Government will receive 23 per cent of the total rent paid by the tenant through tax. Equally, the proportion of rental income paid to the Government will increase from 23 per cent to 24 per cent for such a property as a direct result of the new rental inflation cap. If this property was ungeared the proportion increase is also 1 per cent from 40 per cent to 41 per cent.
Clearly this is just one example, but it does invite the question are investors being taxed out of the market?
If the tax take was reduced through even bringing forward the planned increase in mortgage interest relief, what impact would that have on investor appetite?
There is no doubt that private landlords require a more equitable tax treatment, particularly given the very favourable tax structure offered to other investment vehicles such as REITs.
To date much of the debate on the rental crisis has centred on the need to bring in a professional landlord structure into the Irish market. This is true. However, just like every other property market in the world, there is also a role for private landlords.
We are in the middle of a deep and painful housing crisis. The lack of rental accommodation is leading to significant hardship for many, and is a potential threat to our future economic success.
We should leave no stone unturned in seeking a solution however unpalatable to the populist culture. Marian Finnegan is chief economist with Sherry Fitzgerald