One of the more damning critiques of the Government’s housing plan came from Eoin Burke-Kennedy, who had only a few days before reminded us that growing supply won’t reduce prices:
‘There are two fundamental forces fuelling the housing crisis here: supply and price. One is too low, the other too high. Everything flows from these two points, the rest is just noise. The Government is wedded to the notion that supply will resolve the pricing issue and make homes more affordable.
The problem is, it won’t.’
It gets even worse when it comes to private rents. ‘Housing for All’ states that:
‘Rent increases are unsustainable and are causing affordability issues, particularly for those with low incomes . . . ‘.
But it doesn’t acknowledge that rents are already too high. Nor does it acknowledge that this situation could get worse.
As demand for rental accommodation increases, supply is already falling.
The number of tenancies has fallen from 313,000 tenancies to 298,000 in the last three years – caused by the failure of new supply to make up for properties withdrawn from the market.
The policy document doesn’t refer to this trend, content to assume an average annual increase of 6,500 in ‘new private rental homes’ up to 2030. They may be hoping that the combination of new cost-rental units (an average of 2,000 new units per year up to 2030), new affordable housing and increased social housing supply (which would reduce the number of HAP-subsidised private tenancies) will open up new units for rent.
Will this lead to rents falling to the levels that exist in the capital cities of our peer group in the EU?
Probably not, especially as the ‘Housing for All’ plan does not have a commitment, never mind the policy instruments, to significantly reduce rents.
The Government is hoping that cost-rental units will reduce rents by 25 percent against market rents. However, they are projecting only 2,000 units per year up to 2030, which they accept that, in the short-term, won’t impact on the market - that is, provide low-rent options that would force private rents down.
We are still playing in the ‘supply reduces prices’ sandbox. But, as Burke-Kennedy reminds us, increased supply won’t necessarily reduce housing costs. Rory Hearne takes us even further into the market:
‘The plan is simply insufficient and will not reduce rents at this scale. This, I think, is the intention. The market is not to be disrupted, because they are still looking to incentivise the private market to provide the supply of rental homes, including investors. And they want to keep rents high so it remains an attractive investment for institutional investment funds.’
There is considerable evidence to support Rory’s analysis. First, Irish rental yields (rents as a percentage of the property purchase price) are high by international comparison. The Global Property Index shows Ireland with the highest rental yield among our EU peer group (based on a 120 sq.m. apartment in major city centres).
In some cases Irish yields are more than twice those pertaining in other countries.
According to the Business Insider, Ireland has the eighth highest rental yield in the world, with an average rental yield of 6.6 percent.
And Numbeo shows a similar high rental yield in Dublin compared to capital cities in other peer group countries – both inside and outside the city centre.
These percentage differences may seem small, but their impact can be significant. An indicative guide is that for a city-centre one-bedroom apartment, one percent in the yield is equal to €270 per month or €3,200 per year. Imagine the reduction if percentage yields fell to the levels of Vienna or Stockholm.
Of course, there is more to rental profits than just the yield. The gross yield does not include taxation, maintenance, debt-servicing, etc. An older building is likely to need more maintenance than a newer building, for example. But the starting point is Ireland’s high gross yields.
And this is where it gets grim. The main drivers in the rental market are institutional investors and large landlords. While they make up only a small proportion of the market nationally (though higher in Dublin), they can effectively set the rent benchmark. This is because (a) they can enter the market at any price (rent caps don’t apply to new property); and (b) other smaller landlords use this higher price as a benchmark. Landlord businesses don’t really like competition. It is easier to let the large actors set an ever higher price and follow that.
The Government’s rental sector policy is, as Rory points out, based on increasing institutional investment as they are the ones building rental accommodation and bringing it to market, replacing smaller landlords leaving the market. But this comes at a steep price.
The Residential Property Board has published some useful assessments of the rental market from the landlords’, tenants’ and letting agents’ perspectives. And they point out the risks of relying on highly mobile capital.
‘If investment returns decline. If rental levels decline then the return on investment will decline and investment funds may seek to go elsewhere.
‘If alternative investments generate a return. Interest rates and returns on bonds remain low currently. But they will rise at some stage and then they may present a viable alternative.’
A government policy of actively reducing rents through market intervention could cause investment funds to go elsewhere. And rental yields need to be kept high in the event that a recovery creates alternative investment destinations (e.g. bond returns).
The government is reliant on these internationally-mobile funds and, so, is effectively prevented from taking any action that might undermine the investment returns. High rental yields are locked into the system, business landlords continue to expand. It is only the tenants - and the productive economy – who suffer.
Dr. Lorcan Sirr suggested that Housing for All appeared to be:
‘ . . . designed to not make market prices fall.’
This is certainly the case when it comes to rent prices.
In my previous post I argued for creating alternative markets; in particular, an alternative rental market which would see an expansionary public component in what has been, to date, a private market. However, if we start down a rent-deflationary road we could see a significant private sector withdrawal or slowdown. This could exacerbate the market, leading to higher rents and/or diminishing supply. Reducing rents requires a different market configuration.
And this is probably the most depressing aspect of ‘Housing for All’. Not only are there no proposals to significantly reduce rents; there is not even a discussion of the market itself – the role of institutional landlords, long-term finance, public sector interventions. This failure to discuss the private rental market shows either a failure of evidence-based policy making, ideological bias, confusion or, at its worst, a surrender to ‘the market’.
Whichever, it makes for a bad day’s work.
Wonderfully intelligent analysis, but grounded in reality.
Very accessible, makes me wish I studied Economics!
Great work Michael.
Posted by: Luke Brennan | September 18, 2021 at 09:59 AM