Thursday 27 October 2016

Rapid rise in private sector rents a major threat to retail growth and competitiveness

PJ Drudy

Published 23/10/2015 | 02:30

Property prices
Property prices

The on-going debate surrounding the rapid increase in private sector residential rents in Dublin and other major urban areas has so far focused heavily on the surging homeless numbers and the effects on the most marginalised in society.

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A recent report from the Dublin Region Homeless Executive showed that half of the new homeless families were either evicted or unable to afford a home in the private rented sector.

It is also deeply worrying that the vast majority of the new homeless have never been homeless before. However, in addition to increasing the numbers of homeless, rapidly increasing rents are having troubling impacts on our economy and society, and this has not been sufficiently highlighted to date.

Increasing residential rents should be a major source of concern to anybody in retail or other consumer-related businesses. In effect, they represent a potential double-whammy for small businesses.

Rent represents an enormous slice of the weekly income of hundreds of thousands of tenants, and with surging rents, a sizeable chunk of the population is facing rapidly shrinking disposable incomes.

This inevitably has severe repercussions on retail and consumption levels, which will, by definition, lower levels of job creation and economic growth. Some astute retailers already realise that escalating private rents will further adversely affect their businesses.

This is, of course, in addition to large rent increases being demanded by their own landlords.

Some might argue that increasing rents will mean that landlords have higher disposable incomes.

However, this neglects two points. The first is that tenants outnumber landlords by about 5:1, and a landlord is almost certainly going to have a lower marginal propensity to consume than a tenant. In other words, tenants are more likely to spend a higher proportion of their incomes than landlords, for the simple reason that tenants, on average, tend to be less well-off. The second aspect of the double-whammy facing businesses is the obvious upward pressure that increasing rents will put on wages. Higher rents will invariably lead to demands for higher wages, which will affect profit margins of small businesses more than any other sector.

Increased wage levels will affect Ireland’s ability to compete internationally with other nations, and will again have a further negative effect on growth.

In recent times, private sector rents have been increasing in Dublin at 10-20pc and more. How can employees and their trade unions be expected to refrain from making similar wage demands?

Therefore, escalating rents increase the profits of domestic and multinational landlords, but they are contrary to the national interest.

Action to regulate rent increases in line with inflation or some reasonable percentage is long overdue. This is the case in a range of European countries.

What has been most interesting about the rising rents debate so far is the complete silence of the employers’ groups on what is such an obvious and glaring threat to the interests of the vast majority of their members.

It is unclear as to why they have as yet failed to speak out on this matter. The owners or tenants of small businesses must surely ask why their interests are not being represented by organisations such as ISME and IBEC. Their silence on this issue is surprising.

Clearly, some large businesses benefit enormously from rising rents, most particularly banks, real estate investment trusts, and multi-national landlords.

From an investment perspective, the value of a property is determined by its annual rental yield. Thus, rising yields lead to high house prices, which provide capital gains for landlords and improve the balance sheets of banks. This is not in the national interest. It also provides little comfort to small retailers and their cash-strapped customers in the private-rented sector.

The Government’s advisory body, the National Economic & Social Council, has recently recommended a system of ‘rent regulation’ (which would achieve ‘rent certainty’) in association with actions to increase housing supply and security of tenure (NESC Report 141, 2015). Small businesses should realise that these proposals would be in their own best interests – and even mean their survival.


PJ Drudy is Emeritus Professor of Economics and currently Co-Director of the Centre for Urban and Regional Studies, Trinity College, Dublin

Irish Independent

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