Rents are at an all-time high. People are still becoming homeless because they can no longer afford the high rents being charged. But the situation is improving in relative if not absolute terms. Instead of rising at 13 per cent, which they were just two years ago, the latest figures show rents increasing by about 3 per cent annually. That may be cold comfort for those who have to find the extra cash at the end of the month, but it does appear that the market is moving in the right direction.
TCD economist Ronan Lyons accepts the relative nature of the improvement. “The situation is improving slightly but only if you are looking at the changes and not at the levels,” he says. “Rental inflation is now below 4 per cent instead of the 12 per cent or more it was a couple of years ago. That is an improvement. It reflects estate completions moving renters into homes. But there is no improvement in overall availability. We still see fewer homes to rent than we did last year.”
He does see some light at the end of the tunnel, however. “About 20,000 to 25,000 rental properties are at various points of the planning and construction system at the moment,” he points out. “That will definitely help. It is kind of a five-year timeline going by what we know now but it will help.”
Anticipated shortfall
On the other hand, big though it appears, that number will only meet between one-third to one half of the anticipated shortfall in the Dublin market during that period. “It will go some way to help but the numbers are still inadequate.”
Interestingly, the presence of institutional investors – the so-called cuckoo funds – in the market is actually a good thing as they are funding apartment developments which might not otherwise go ahead. “In some ways the Government has come up with a new category of accommodation – build to rent,” Lyons notes. “Pension funds have lower yield requirements than developers.”
But individual landlords are still leaving the private rental market, according to Marian Finnegan, managing director of Sherry Fitzgerald residential. “Every single year since the recovery began there has been a strong outflow of investors from the market. For every investor coming in, two are leaving. That’s largely a reflection of the tax the investors are paying, and the capital appreciation isn’t there anymore. We are losing 5,000 units out of the market each year. The need for investment is still there in private rental property is still there.”
“We have been saying it for quite a while and the Residential Tenancies Board said it earlier this year when they came out and said there had been a contraction of 12,000 units in private stock”, she adds.
Standing stock
Investments by institutional funds haven’t necessarily led to an increase in stock, Finnegan points out. “The funds have to date been investing in standing stock. Of the €1.2 billion investment in the private rental sector by the funds last year, €600 million was invested in existing units and only about 200 additional units came to the market as a result of that. The other €600 million is in future developments and when that starts to come through in the next couple of years, it will be part of the solution.
Lyons believes high construction costs are at the root of the problem. “The breakeven point for apartment developments is lowered for the funds by spreading the construction costs over a longer period. A lot of the 20,000 to 25,000 homes coming on stream are because of the build to rent market. It was always known this would be a relatively quick win as it made developments in most of Dublin and Cork viable.”
That said, there is still a need to address underlying construction costs. “Dublin is one of the most expensive cities in the world to build housing and no one knows why,” Lyons adds. “But the Government has shown no interest in finding out. Things have been improving in the rental market but the three key issues of high construction costs, high land prices and poor social housing policy remain to be addressed.”
Social housing
Increased social housing provision would undoubtedly take some heat out of the market but the Government seems to be going about this in the wrong way. “In the early 1990s, the government decided to get out of social housing. This didn’t matter for 10 years because of the ease of credit. That changed once credit got tighter. Social housing policy now is procyclical. The higher the market goes the more money is spent on it. It would be better if it was countercyclical and more social houses were built at times when the private market is delivering fewer units. There is a cost rental model already there for the social housing segment of the market. A land value tax can help with land costs.”