Home truth is we may need to curb migration
The Government's temporary rent controls are warranted, but its analysis is lacking on the demand side of the problem, writes Dan O'Brien
Dublin rents are by far the highest in the country. They now average €1,308 a month. That is around a third more than in other cities. And they are rising fast. Over the past four years, they have increased by a quarter.
That is less exceptional, even if it is at the higher end of the national average. High prices and high inflation are a bad mix. Dublin's renting residents face both.
Last week's Government strategy on the rental market had a curious omission. It did not discuss affordability of rents.
When the Government's overarching housing strategy was published during the summer, rent affordability was discussed. The figures in that report showed that rents in Dublin in 2015 were equivalent to 40pc of disposable income, almost twice the national average. There is a very big gap between Dublin and even the highest rent areas in the rest of the country. Galway city was second in the unaffordability league. There, rents are equivalent to just under one third of disposable income. Rents in Cork city were marginally more affordable than in Galway.
The difference between Dublin and the rest of the country is largely explained by the relationship between demand (population change) and supply (housing stock, along with occupancy rates).
Dublin - both city and county - is exceptional. There were 1.34 million people in the county on census night last April. Compared with the previous national headcount in 2011, that amounted to an increase of more than 70,000.
The census showed that the number of homes in Dublin had increased by just 5,000 over the same period. The number of vacant homes fell by 7,000. One doesn't need a calculator to see that the increase in housing in the capital is lagging way behind the increase in the population.
In the country's other cities - Cork, Limerick, Galway and Waterford - there is nothing like the divergence between population growth on the one hand and change in the housing stock and occupancy rates on the other. That is also true of Dublin's commuter counties - Wicklow, Kildare, Meath and Louth.
The decision by the Government to introduce a cap on rents over three years was a big call. While multiple downsides usually flow from the blunt instrument of price controls, they can be warranted in some cases. In the current environment in Dublin, they are warranted as a short-term measure to contain rent inflation which is causing hardship for many. However, on the basis of rent levels and affordability, it is far less clear that they are warranted elsewhere.
The measures are quite well designed. Although the inclusion of Cork city as a zone designated for rent-capping is strange, the notion of geographic targeting is good, taking away some of the bluntness of the instrument. Smarter still is the exclusion from capping of new and refurbished rental properties. That avoids the most damaging, supply-dampening aspect of placing a ceiling on rents by legislative fiat.
Another argument against such caps - that they will reduce supply by causing landlords to sell up - is not strong. Having won some additional rights in the overall package and having enjoyed significant increases in recent years, rental yields, in Dublin at least, are likely to be juicy enough to keep most landlords in the game.
But while the Government was right, on balance, to resort to a cap in Dublin, it is not a lasting solution to high rent inflation, as many voices have been claiming over the course of last week.
No reading of the international evidence on rent controls points to them being either effective or, ultimately, fair (long-term rent controls often end up benefiting insiders to the detriment of outsiders). That is because there are plenty of downsides. The most obvious is that they actually harm supply of new housing in the medium term. That happens in a number of ways.
One way is that when governments introduce such measures, they inevitably come under pressure to go further. That was to be seen last week after the measures were announced. Immediate demands were made for a lower cap and for more areas to be included.
Would-be investors are aware of this and must plan for the risk that rent controls will become more onerous. As more risk always means less investment, this effect will have at least some negative impact on new building.
Another channel through which the controls increase risk for those investing in the market is that they might not be lifted after the proposed three-year time-frame set out last week. That is because once governments embark down the path of price controls, doing away with them can be very difficult. If and when the new rent controls are lifted, the pent-up imbalance between supply and demand will likely be unleashed. That will to lead to a spike in rents. That, in turn, will have political consequences, and whoever is in government at the time will be strongly tempted to extend the controls.
The rental strategy document contains a lot more than price cap measures. Most of it focuses - correctly - on the supply side of the problem. But there are no measures designed to lower demand, or even any analysis of demand side factors. In the short term, attempting to curb demand could be part of the solution. This could be done by slowing the issuance of work visas because official data shows that population growth in recent years has been driven overwhelmingly by people arriving from outside the EU (who require visas).
The CSO National Household Survey for the third quarter of 2016 shows that the number of Irish adults in the State rose by 10,000 over the previous five years, while the number of adults from EU countries (all the other 27 members) fell by 8,500. The number of adults from outside the EU increased by 37,000.
It is important to say that these CSO estimates for 2016 have not incorporated April's census. When that happens early next year, these figures will certainly change. If the revised figures confirm that people from non-EU countries account for the overwhelming majority of the increase in the adult population then there will be a case to look at the system of work visa issuance (numbers have been rising fast in recent years).
Currently, the work visa system looks at each application on a case-by-case basis. It doesn't consider wider impacts such as rent inflation. There is a case to broaden the analysis.
None of that is to say that dampening housing demand by lowering the flow of newcomers is in any way costless. As is the case with rent controls, there are a lot of negative consequences to cutting back on visa issuance.
The vast majority of people who get visas start working immediately on arrival. They create wealth and pay taxes. Lowering or capping the number of visas would mean forgoing these gains.
Of even more import is the wider downside. Ireland is a highly globalised economy with lots of highly globalised companies. Making it more difficult for them to bring their globalised employee base to Ireland would be damaging for their businesses and would likely make the country less attractive as a location for investment.
But as in the case of temporary and targeted rent controls, there can be a case to consider temporary and limited reductions in immigration if it is in the interests of all those already living here, both national and non-national.
Addressing the rent and wider housing problem is primarily about supply. There is a broad consensus on that point. But ignoring demand side issues entirely, as has been done, does not appear sensible.