There is little doubt the residential property market is one of the greatest challenges facing Ireland today.
Despite the calamity of a financial crash followed in quick succession by a global pandemic, the Irish economy is relatively sound. However, while our economy continues to recover and grow, the property market is still suffering from the after-effects of both crises.
With a healthy economy comes an increase in the demand for accommodation, and the market has not been able to respond quickly enough.
We don’t simply have a housing crisis, we have an accommodation crisis. Calling it a housing crisis implies we simply need to build more houses. We need to build more homes of all types for everybody.
Government policy, with some success, has front-loaded the construction of starter homes for first-time buyers. However, our housing market requires a lot more than just homes for first-time buyers.
The number of properties available to rent has fallen significantly in recent years. Private investors are abandoning the buy-to-let market. For much of the past decade, for every single investor buying into the market, two are exiting. In the past five years alone, the number of private tenancies in the State fell by more than 20,000. This came at a time when the need for more rental accommodation was increasing rapidly.
Not acceptable
This trendline is also corroborated in mortgage statistics from the Central Bank of Ireland. In June 2012, there were a total of 150,187 outstanding buy-to-let mortgages, according to the Central Bank. By March 2021, this figure dropped to just more than 94,000, a fall of 37 per cent in just under nine years. In contrast, the total volume of outstanding mortgages for principal private dwellings fell by only 5 per cent in the same period.
This is simply not acceptable. We need a growing, not a contracting, stock of rental property.
Government policy initially indicated that the PRS (build-to-rent) sector was the solution to the rental crisis. However, even with this, there was some backtracking. In May this year, the Government increased the stamp duty rate to 10 per cent on purchases of 10 or more residential houses or duplexes at a time. This was a counter-intuitive move during an accommodation crisis.
PRS is a relatively new concept in the Irish market, beginning in 2013. In the intervening years, investment has grown quite quickly with a record €1.1 billion invested in the first six months of this year alone. But the reality is that investment by PRS funds is simply not sufficient to counteract the net outflow of private buy-to-let investors, and so the rental crisis worsens. This is particularly evident in rural Ireland.
About 70 per cent of all private tenancies are in the greater Dublin area and regional centres of Cork, Limerick and Galway. Most counties in Ireland have fewer than 5,000 private tenancies each. This is simply not sustainable.
Current market conditions are clearly a direct response to inadequate supply levels and yet the Government’s policy to date does not address this imbalance at all in the short term. Instead, it focuses on capping rental inflation in key urban areas. This is disappointing, it is akin to treating symptoms rather than addressing the cause of an illness.
There is clear evidence that rental yields for private investors are too low. Take the example of a two-bed apartment in the centre 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 2.5 per cent.
In this example, the Government will receive 25 per cent of the total rent paid by the tenant through tax.
This is just one example, but it does beg the question: are private investors being taxed out of the market?
Simply removing PRSI and USC from rental income in the first instance would have a positive impact on yields. Landlords who own multiple properties could be facilitated in offsetting all business costs, against tax to encourage the professional landlord sector.
Affordable
Further incentives could also be provided for landlords who offered a discount on market rents for tenants whose household income was below a certain threshold. This latter option would not only encourage the retention of landlords, but also increases choice in the affordable rental sector.
All viable initiatives that address the loss of properties from the rental sector are required urgently.
There is no doubt private landlords require a more equitable tax treatment, particularly given the very favourable tax structure offered to other investment vehicles.
Steps to address the loss of properties from the rental sector are required immediately. However, they will be only part of the solution. While much has been achieved to date, we are still too far away from equilibrium in the overall market. Every effort needs to be made to fast-track the supply of property to the market in the short to medium term.
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 managing director of residential and advisory at Sherry FitzGerald
