No light yet at the end of property tunnel
Rather than a signal that the worst may be over, the first increase in rent prices that we have seen in two years could be no more than a temporary blip on the economic radar, writes Louise McBride
Published 21/02/2010 | 05:00
WE'RE almost three years into possibly the worst collapse in house prices that this country has ever seen. With house prices now back to 2003 levels, many homeowners, including the tens of thousands in negative equity, will be glad to see the back of the property downturn -- if it ever comes.
So does last week's report from property website Daft.ie -- which found that rental prices across the country rose for the first time in two years last month -- offer us the glimmer of hope we so badly need?
Could this be a sign that homeowners are finally about to see the price of their properties edge upwards -- and landlords, their rent?
At 1 per cent, the increase in January's rental prices recorded by the Daft report doesn't seem like too much to shout about. But this slight increase follows two years of freefall in the rental market -- which has pushed prices down by 25 per cent overall.
The report also found that rents didn't tumble as steeply in late 2009 as they did in the early part of that year.
There could still be a latent supply of properties which would come back on the market if rents started to pick up -- which would depress prices
"House and rent prices do tend to follow each other to some extent," says David Duffy, an economist with the Economic and Social Research Institute. "But our economy and labour market remains weak, unemployment is forecast to go up and incomes have fallen.
"This will reduce demand for rental properties at the very time when supply is high. Furthermore, a lot of migrants will be leaving Ireland and they tend to rent rather than buy -- so there may be further weaknesses to come in the rental market."
Mr Duffy believes house and rent prices still have "a bit of a drop to go" and will remain weak until the second half of the year.
Some, however, believe it will be long after mid-2010 before the property market starts to turn. "My own view is that house prices will continue to edge downwards and that it could be four to five years before house prices recover," says Dr John McCartney, a state economist and former head of research with Lisney estate agents.
"The country's economy is not going to give us much joy over the next 12 months -- as a result, consumer confidence will remain low and people won't want to buy properties. It would be a bit of a leap to say the 1 per cent increase in rents last month suggests the property market has bottomed out."
The director of a Dublin stockbroking firm, who does not wish to be named, describes the levelling-off in rent prices as "encouraging".
"It is unlikely that rents have actually increased at all and until such time as much of the existing over-capacity gets used up, I think that an increase in rents is unlikely," he said. "Despite this, the report is a good indication that prices are not falling as quickly as they were. The residential rental sector is one sector in a wide market but it is one of the leading indicators as it probably adjusts quicker than most other indicators -- as landlords adjust rents."
The uptake in last month's rental prices may reflect a pick-up in confidence on the back of last December's Budget, according to Alan Gray, managing partner of Indecon economic consultants.
"The small increase in rent prices is likely to reflect the stabilisation of confidence in the economy," said Mr Gray. "Although it is extremely difficult to predict the future movements in rental prices for the rest of this year, some small increases may emerge. It would be a mistake, however, to expect a significant overall increase in rental prices in the coming year given the high level of unoccupied properties available in many parts of the country."
Alan McQuaid, chief economist with Bloxham, believes rent prices will "continue to push modestly upwards" for the rest of the year.
"The figures are more a reflection of people who want to buy a home holding off until credit becomes available and the labour market stabilises," said Mr McQuaid. "These people are seeking temporary accommodation. The figures may also reflect more Eastern Europeans coming back to Ireland in expectation of better times ahead in the second half of 2010."
Yet, the 1 per cent increase in rental prices recorded in the Daft report could simply be a "temporary blip", warns Patrick Koucheravy, property economist with CB Richard Ellis.
"If you look at statistics going back over the years, there tends to be an increase in prices at the beginning of the year," says Mr Koucheravy. "The increase isn't an indication that the market has changed. There's a lot of rental stock still on the market and tenants remain in a strong bargaining position."
Tony Foley, a senior economics lecturer with Dublin City University, believes there is little evidence of greater demand for rental properties, apart from among would-be house buyers who are sitting on the fence.
"This will be partly offset by reduced demand from lower employment levels and increased emigration," says Mr Foley. "The big issue is if the reduced supply of the recent past will come back on the market."
One of the striking findings of the Daft report was a 20 per cent fall in the number of properties available to rent between last February and August -- a development which the website's economist, Ronan Lyons, suggests could be behind the levelling-off in rents.
However, this dramatic drop in rental stock is a bit of a mystery. "Rent prices respond quite quickly to changes in rental stock," says Dr McCartney. "But it's quite unclear why people would be taking their rental properties off the market.
"By historical standards, we still have a huge amount of rental properties available.
"And there could still be a latent supply of properties which would come back on the market if rents started to pick up -- which would then depress prices. People may have withdrawn their rental properties from the market but these properties still exist -- and are still surplus to market requirements."
The Daft report found that the average rental yield -- that is, the return made on a rental investment -- is now about 3.5 per cent. Rental yields are often expressed as a percentage of the purchase price of a property -- or of its current value. So, if the value of a property has fallen, the rental yield can increase.
"There are deposit accounts where you can get better returns than the average 3.5 per cent rental yield," says Dr McCartney. "Rental yields are so low now, they have to go up. But even if rental yields go up later in the year, it doesn't mean that the property market has recovered. It may imply that house prices have further to fall."
Whether the tiny rise in rent prices is a blip or a sign of more positive things to come remains to be seen. Yet, with 435,000 on the dole queue, more than 26,000 homeowners in mortgage arrears, and hundreds of companies still going bust each month, it would be a crazy straw of hope to clutch to.