Thursday 25 December 2014

Rip-off rents and negative equity, but don’t panic yet

Published 15/05/2014 | 02:30

Euro Coins pile House with banknote roof and key
Euro Coins pile House with banknote roof and key

COMPLETE confusion reigns supreme around almost every aspect of the housing market.

It wasn’t supposed to be this way. Just two-and-a-half years ago the pessimists still felt that house prices would continue to fall for another five to seven years.

Ghost estates, negative equity, mass unemployment and emigration were expected to keep the property market down for a lot longer.

It hasn’t quite panned out that way. House prices stopped falling in the middle of 2012 and then bumped along the bottom and are showing modest increases. The exception is Dublin where they have shot up by over 15pc in two years.

Now the focus is coming on rents. They have risen by close to 20pc in Dublin in the past two years and are showing no signs of abating. There are several factors at play here, including strong rental demand, with relatively small suitable rental supply.  This has allowed landlords to completely rip people off. And they are doing it in style.

Property prices in Dublin really hit the bottom in the middle of 2012. CSO figures show that Dublin houses were 54.4pc from peak at that stage. We know that lots of cash buyers have emerged in the past two years and snapped up Dublin properties to rent them out. And why not, it’s a vital and valuable service.

However, combining data from the CSO and the latest Daft.ie rental report shows just how much people are being ripped off.

A house in Dublin that cost €500,000 at the peak of the boom would have gone for around €228,000 in mid-2012. Bought up at the time by an investor, he is has seen its value rise by around €33,700. He won’t pay any Capital Gains Tax on the sale of the house if he keeps it for seven years.

The same data base shows that a Dublin apartment costing €400,000 at the peak could have been bought for €154,000 in mid-2012, having fallen by 61pc in value. It has now risen by around 19.5pc or €30,000.

According to the latest Daft.ie rental report, average rents in North Dublin City in 2007 were around €1,380 per month. When the landlord investor might have come along in 2012, they were €1,000. They are now averaging €1,240 or just 10pc shy of their 2007 peak. Tenants have seen average monthly rents rise in the area by €240 per month (or €60 per week) in the past two years.

In South Dublin City, average rents are also running at just 10pc below their 2007 peak levels. Yet investors who bought these properties in 2012 were able to buy at half the price, have got a 15.8pc capital gain so far, and have jacked up rents by €280 per month in the last two years.

There is nothing going in the economy to justify these incredible rent rip-offs other than they are doing it because they can. The market is messed up. Yet, ultimately it is a marketplace in which people have something to sell (or rent) and there are lots of people able (or willing) to pay those prices.

Should these landlords be applauded for their risk-taking and insight or criticised for clearly greedily jacking up prices because they can get away with it?

The first question is who are they and what are their circumstances? Some of them did not buy at the bottom in 2012 and may well be massively in negative equity on their investment properties. For them it isn’t greed — it’s survival.

Others may have already handed over the rental income and control of the properties to their bank, and it is the bank’s representative who is hiking up the rent. This would perhaps be the most obscene scenario of all.

The longer the banks sit on the houses, increasing rents, the more the value of the property increases and improves the bank’s balance sheet. Meanwhile, the tenants are either overstretched and broke, or are working very hard paying income tax which will be used to cover the cost of bailing out the bank!

The debate is now around what to do about this mess. Solutions tend to go in two different directions. The industry lobby groups say it is simply a shortage of houses. Government therefore

should incentivise the industry to build more houses quickly. It should bend

over backwards to reduce bureaucracy, cut red tape and regulations, and provide cheap finance and tax  breaks. 

The other solution is to control rents. Adopt continental style rent control legislation which will prevent landlords from hiking up rents above specified levels.

Both solutions are fraught with difficulty. The first one is just a 2014 version of what people thought would slow down house price growth in 2005. It pre-supposes that despite the rising market, and rising rents, builders must be incentivised to build more houses because it isn’t profitable enough right now.

The second one is a direct government intervention in a private sector marketplace which is rarely a good thing. It could be a recipe for lack of investment in new houses or in refurbishment of existing rental properties.

Why not leave it alone? Landlords have a propensity to be greedy. But it has been like that for hundreds of years. Market forces, through improved supply, are the best way to prevent it.

However, if house prices and rents do continue to rise, especially in Dublin, new houses will be built. There will be a compelling commercial case for it. More subsidies or watering down building regulations aren’t necessary. 

Part of the problem is that just a handful of developers hoarded large tracts of suitable land during the boom. Most of them are bust now and in Nama. The state agency should play a part here.

Plus, one of the reasons why there aren’t many houses available is because close to 400,000 people are in negative equity. People, who would normally have their house on the market by now, are stuck and going nowhere. This is also contributing to the aberrations in the housing market.

It is still early days in this property recovery. We shouldn’t hit the panic button yet.

Irish Independent

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