With human health at risk because of the coronavirus it feels almost vacuous to be writing about property. However, housing is one of the key social issues of our time and, when the coronavirus pandemic eventually passes, it will inevitably re-emerge as a topic of debate.
A major trend over the last decade has been the tenure shift from home ownership to private renting. There are now 351,800 households renting privately in Ireland, an increase of a third (88,400 households) in the last 10 years. The reasons for this really tell the story of Ireland in the 2010s; a strong economic recovery following the global financial crisis (GFC) led to inward migration, fuelling the demand for housing.
The construction industry was initially unable to respond – partly due to its bedraggled state after the GFC, partly due to tight development credit, and partly due to high building costs in Ireland. This combination of strong demand and lagging supply led to sharply-rising house prices. At the same time tighter banking supervision brought in strict mortgage rules. These made it harder for households to afford the high prices that were being charged. The net result was a surge in demand for rented property.
Vengeance
The supply-side response to these developments has been interesting. After a slow start, construction took off with a vengeance. Even the narrowest measure of housing output shows a near fivefold increase between 2013 and 2019.
However, the ownership of this new stock differs from what we are used to. Since 2013 landlords have consistently accounted for about a third of the new homes being purchased. Perhaps this is unsurprising given the tenure shift noted above. But a more striking observation is the changing nature of the landlords. Back in 2013 the majority (57 per cent) of landlords buying new houses and apartments were small-scale investors.
Today this group only accounts for about 10 per cent. In contrast, corporations, not private individuals, account for 90 per cent of the new dwellings being purchased by landlords. Last year bulk purchasers spent €2.4 billion on apartments in Ireland, acquiring nearly 5,900 units through block sales. The bulk of their purchases were in Dublin where they accounted for over 25 per cent of the year’s total sales.
It is important to recognise that the block-buyers are a disparate group – including local authorities and Approved Housing Bodies. But the ones that attract most attention are the large commercial providers of rental units to private tenants. Given public frustrations around housing this group has become something of a lightning rod for criticism. Savills has been instrumental in bringing institutional investment into the Irish residential sector, and so I cannot claim to be a disinterested party. But, for what it’s worth, I can say three things in defence of such institutional investors:
Firstly, these entities constitute an increasingly material share of the rental supply – particularly in our cities. Any argument that they are crowding out first-time buyers must be balanced with the fact that rents would be higher if they were not supplying these units.
Secondly, the institutions have played an important role in getting stuff built. Last year 3,110 of the 5,884 block-bought rental units (53 per cent) were forward-purchased. Without these advance commitments it would have been more difficult for developers to fund their builds and the schemes may have been delayed or may not have proceeded.
Finally, the institutions generally work hard to minimise tenant turnover, particularly in markets like Ireland where occupiers aren’t tied to a unit by having supplied their own furniture. The practical benefits for tenants tend to be good on-site amenities and the security of knowing that the landlord is not going to sell the property.
Huge uncertainty
There is obviously huge uncertainty at present. But when the dust settles this is how I see things; rapid growth in housing output and flattening population growth have led to a more balanced, less inflationary market. Covid-19 may cause a temporary setback, but earnings growth should exceed house price inflation over the medium term. When we add in leverage and ultra-low interest rates, this will make home ownership more affordable – just as it has quietly been doing over the last 12 months. So, after things settle back down, I predict a fairly active new homes market.
The private rental sector has been something of a one-way bet for investors in recent years, and those who bought apartment blocks have done exceptionally well. However, more affordable home ownership may cause the last decade’s tenure shift to reverse. This, and a generally more balanced residential market, mean that investors will need to be selective and well advised about where they put their money, with a sharp focus on schemes and locations that will appeal to affluent young professionals who constitute a natural and enduring audience for good-quality rented accommodation.
Dr John McCartney is director of research at Savills
