Rent costs, not rent prices, the issue

Taking into account all rental markets nationwide, rents in December were ever so slightly lower (0.1%) than three months previously. This is the first time since mid-2012 that rents have not risen nationally in a given three-month period – ending an extraordinary run of 29 consecutive quarters of rental inflation.

However, there is a split between urban and rural areas. In Dublin, rents rose 0.4% in those three months and, taking the average of the four other cities, rents rose by 0.7%. Outside the five main cities, rents fell by 0.8% – with the largest falls seen in Connacht and Ulster. Rents in Monaghan fell by 2.8% in three months, for example, while they rose by 1% in Cork city.

Even in urban areas, however, year-on-year rental inflation has moderated significantly over the last 24 months. The annual increase in the national average rent was above 10% from early 2016 all the way through to late 2018. Inflation is still positive but, at 4.1% nationally and 3.5% in Dublin, it is at its lowest level since 2012.

It is, of course, impossible to view these figures and not think of Election 2020. Housing became perhaps the single most important issue in the February 2020 election. Health was, of course, not far behind. But it has been an issue for so many elections now, it hard to see how that will have swung many voters – the infamous comparison of Ireland’s Department of Health to Angola dates back to the 1990s.

No doubt to the dismay of the out-going Government, the other candidate for main election issue – Brexit – has apparently been deemed by voters to have been more or less resolved. This is of course far from the truth, with it very likely that the new government will increasingly have to devote its attention to the new EU-UK trade deal, as 2020 progresses.

But housing appears to have topped voters’ concerns. And given what has happened in the Irish housing system over the past decade, it is not hard to see why. As outlined in the commentary on the last report, after twin real and financial shocks to the housing system starting in 2007, housing moved gradually from problems of excess to problems of scarcity.

This began in urban rental markets as far back as late 2009, when I noted in the commentary on the Rental Report then that it looked as though Dublin was running out of surplus accommodation. Shortages of housing then subsequently spread countrywide, in both sale and rental segments – with the sales segment in some Munster markets being the last to bottom out in 2014.

The second half of the 2010s saw a response, albeit a weak one, from the supply side of the market, with growing numbers of new homes built, year-on-year. From a low of fewer than 5,000 completions in 2013 to more than 20,000 homes being built in 2019. However, the bulk of those homes – almost 90% – were either estate housing for sale or one-off housing, most of which never comes on the market.

So, ironically given where the problems of scarcity emerged first over a decade ago, urban rental markets are where those same problems persist longest, as revealed by the figures in this latest Rental Report.

There was much discussion throughout the brief election campaign – and in the months leading up to it – about the economic desirability and constitutional feasibility of a rent freeze. Rent Pressure Zones were introduced in 2016 and had an indirect but easily foreseeable consequence on rental inflation. By punishing landlords who had not increased rents for sitting tenants in the years before they were introduced, RPZs made it normal for the vast majority of landlords to review their rent each year, rather than more irregularly, thus making 4% increases the new normal. Politicians have responded to this by arguing 0% should be the new normal.

The problem with this logic is that it ignores why rents are rising. Rents have been rising because very high construction costs for apartments have made it unviable to build the thousands of new rental homes that are desperately needed around the country. A rent freeze would do nothing to solve the underlying problem of high build costs.

What rent controls do – and we have already seen this with RPZs – is they turn the market into one of insiders and outsiders. Before RPZs, those with existing tenancies were enjoying smaller increases as well as none of the hassle of having to move. This gap between ‘stayers’ and ‘movers’ grew far worse with RPZs, as seen in the dramatic increase in lease length: even if it doesn’t suit you as much any more, once you have a place, you keep it.

A rent freeze would just accentuate this. The most vulnerable in the rental market – those new to the city, those without networks, those who have to move because of a change in household circumstances and those subject to all forms of conscious and unconscious bias – will lose out. Those with good social networks, higher incomes and stable circumstances will, once again, benefit. If that is what the public wants from public policy, then fair enough – but we should be explicit about it rather than claim that this is a policy designed to help those who need it.

What would have a far more serious negative impact is if these rent freezes were somehow linked to newly-built rental homes. This would, in effect, turn off the supply tap overnight. We can see about 25,000 new rental homes on their way over the next few years. While this is still small relative to the gap between supply and demand, it will help.

To solve the rental crisis, the new Government needs to tackle two things: high construction costs and dysfunctional social housing policies. Neither requires a rent freeze. Both will require an investment by the taxpayer. If housing is indeed the top issue for voters, then the new Government has a mandate to make those investments. #Renting