Monday 16 September 2019

Home truths: Irish economy caught in a rental trap

Soaring rents offer good news to anyone who has invested in property, but could prove damaging for the Irish economy as a whole, writes Dan White

26,000 units of new rental property are set to come on line by 2023 in our two largest cities, but even if all of that projected supply materialises, the same amount again will be required by the year 2027
26,000 units of new rental property are set to come on line by 2023 in our two largest cities, but even if all of that projected supply materialises, the same amount again will be required by the year 2027

Dan White

With average Dublin city centre residential rents now having smashed through the €2,000 per-month barrier, soaring accommodation costs are rapidly eroding Ireland's economic competitiveness.

Residential rents rose by almost 6pc in the year to July, reaching a national average of €1,391 per month, according to property website Daft.ie. In Dublin, average rents rose by between 4pc in the city centre to 5.4pc in north Co Dublin.

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Average Dublin rents now range from €1,702 in north Co Dublin and €2,064 in the city centre to €2,206 in south Co Dublin.

Not only are Dublin rents very high in absolute terms, but they are also very high when compared with most other major European cities.

ECA International, which advises multinationals on employees' overseas compensation and benefit packages, estimates that Dublin is now the fifth most expensive European city in which to rent a home, up from eighth a year ago. Only London, Moscow, Zurich and Geneva are now more expensive than Dublin for renters.

Outside of the capital, the highest rents are in the Dublin commuter counties and the other large cities. Wicklow, at €1,452, has the highest average monthly rent of any county or city outside of Dublin.

While rents are much higher in Dublin than elsewhere in the country, they are rising much more quickly in the other large cities.

Average monthly rents jumped by 7pc to €1,266 in Cork city, by 10.5pc to €1,225 in Limerick, and by 9.1pc to €1,297 in Galway.

The lower-than-average increase in typical Dublin rents seems to owe more to affordability constraints - as there is only so much of one's income that one can pay in rent - than to any increase in supply.

"In Dublin, in particular, there is only so much that people can afford to pay [in rent]," says Ronan Lyons, assistant professor of economics at Trinity College Dublin (TCD).

And things are not going to get better any time soon. On May 1, Daft.ie listed just 2,700 properties available for rent, the lowest number it has ever recorded.

Soaring rents are good news for anyone, individuals or institutions, who has invested in a rental property - and the banks who lent them the money.

However, runaway residential rents - which now stand 35pc above their pre-crash peak - are bad news for the economy as a whole.

With the unemployment rate now down to just 4.6pc, full employment to all intents and purposes, what is the likelihood of very high rents feeding through into wage levels, as financially-stretched workers look for higher pay to recoup at least some of their extra costs?

Dublin renters are now paying a third of their total income in rent, estimates IBEC director of policy Fergal O'Brien. When one adjusts for lower incomes elsewhere, renters throughout the country are paying a similar percentage of their income in rent: 30pc in Cork, 28.7pc in Galway and about 29pc nationally.

"A relatively small proportion of the workforce is paying rent. However, these workers are geographically concentrated. They tend to be younger and more mobile, and to live in the major cities," he says.

High rents are making it very difficult to either attract overseas workers to live and work in Ireland, or to entice Irish workers to return to this country, he believes.

Although most renters may be demographically and geographically concentrated, there is strong evidence that rising rents do have an impact upon our economic competitiveness.

An August 2017 report by the American Chamber of Commerce Ireland, which represents most of the US multinationals in this country, stated: "Housing is one of the most critical challenges facing member companies".

As international services companies tend to cluster in major cities in search of their talent pool, the report added: "Residential planning and development need to match this pattern of industrial investment - such as housing, schools, transport and utilities."

That was two years ago. If anything, the problem has got even worse since then, with average Dublin rents having risen by almost 18pc since mid-2017.

"For the modern international services that the IDA is trying to attract to this country, about three quarters of their total costs are labour. What those workers spend their money on, about one third of their total incomes, is rent. That means that housing represents about a quarter of our competitiveness," says TCD's Lyons, who was the author of the American Chamber report.

So why are Irish, and Dublin in particular, rents so expensive and what, if anything can be done to stop them rising even further?

"It is a very significant challenge. It is about affordability and supply. The only answer is to increase the supply of affordable accommodation. The availability of serviced land is the key issue. There are also a lot of other things we can do to bring down the cost of housing. We are not making enough progress," says IBEC's O'Brien.

Easier said than done. Not only is the number of properties available for rent at an all-time low, but there are growing signs that the increase in new construction activity is tailing off.

Earlier predictions that almost 22,000 new houses and apartments would be built this year have been trimmed back, with Goodbody Stockbrokers' Dermot O'Leary now pencilling in 21,000 completions.

It should, of course, be factored in that, while the supply of new houses and apartments coming on stream has major implications for rents, the rental sector is rapidly emerging as a key area of the housing market in its own right.

Build-to-let, where specialist, or 'cuckoo' funds as they have been dubbed, build and then rent whole apartment blocks, is increasingly becoming the norm in Dublin and some of the other large cities.

The latest Daft.ie report estimates that almost 3,600 new build-to-let apartments are currently under construction in Dublin and Cork, with planning having been approved for a further 4,600.

With the 9,500 units for which planning applications have been submitted and almost 8,000 in pre-planning, that adds up to a potential extra 26,000 rental units in our two largest cities.

While there is inevitably many a slip twixt cup and lip, this increase in supply will go some way toward easing the crunch in the rental sector.

But not far enough. Lyons estimates that up to 70,000 new rental homes will eventually be needed in Dublin alone.

Even if all of the planned new rental units do eventually make it to completion, it could take up to four years before tenants get to turn the key on the front door of their new homes.

"What we call 'cuckoo funds' are called landlords in other countries. It is not normal that one's landlord should be a retired policeman," he says.

Regardless of who builds them, these extra rental units are desperately needed. After several years of relatively subdued growth, earnings are now increasing rapidly.

Average weekly earnings increased by 4pc in 2018, up from just 1.7pc in 2017. While this increase was not driven exclusively by higher rents, they certainly made a significant contribution.

It is eloquent testimony to the dysfunctional nature of the entire Irish housing market, and not just the rental sector, that with many institutional investors able to borrow at nearly zero, and with yields (the annual rent as a percentage of the value of the property) on Dublin apartments ranging from 6.1pc to 11.6pc, more hasn't happened to fill the gap in rental supply already.

This is due to a combination of factors; a lack of serviced sites, the reluctance of the domestic banks to lend to local developers, the unwillingness of local authorities to relax restrictions on height and densities when granting planning permission, plus the scarcity and high cost of building labour.

Solving the rental crisis will take a combination of short and long-term measures. "In the short term, we have to do everything we can to keep down the cost of housing", says O'Brien.

This includes measures such as the help-to-buy scheme. This may be akin to a "sticking plaster", he says, but "while the problem is as severe as it is, we have to do whatever is necessary".

Measures such as help-to-buy, by diverting potential renters into the new homes market, will ease pressure on rents, he believes.

Longer term, there is no alternative to a major increase in the supply of housing, both owner-occupied and rented.

Lyons believes that even if all of the projected new rental supply, i.e. 26,000 units, is completed by 2023, at least the same amount again will be required by 2027-28.

Only then would we be in a position to begin closing the gap between supply and demand.

That is the equivalent of at least 50,000 new rental units over the next eight years. Is this an achievable target? If we are to maintain our international competitiveness, then we may have little choice. The consequences of allowing the rental crisis to worsen further could be very severe indeed.

"The whole cost of housing is a massive competitiveness issue. We need significantly greater supply than is currently available. If we don't address this question, Irish competitiveness will be undermined. This is a big issue, bigger than Brexit. If we don't deal with it, foreign companies will go elsewhere," says O'Brien.

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