Soaring rents curb consumers
Rent now takes up to two-thirds of a worker's pay - and it's having a knock-on effect on retailers, says Dan White
The economy is growing at close to 4pc, job creation is strong and private sector earnings are rising. However, tax revenues are sputtering and retailers are struggling as record residential rents eat into consumer spending.
On the face of it the Irish economy is performing strongly. The Department of Finance recently upped its 2017 GDP growth forecast to 4.3pc. And this growth seems to be for real rather than of "leprechaun economics" variety.
The number of people at work grew by 65,000, more than 3pc, in 2016. This strong employment creation has continued into 2017 with the unemployment rate falling to 6.2pc by April of this year.
This tightening of the labour market has been accompanied by increasing private sector wages, up 1.4pc in 2016. Normally this combination of more jobs and rising wages would be good news for the country's retailers as people would have more money in their pockets to spend.
Except that this doesn't seem to be happening, at least not in the shops, this time. A very good barometer of consumer spending are the monthly exchequer tax receipts, particularly for Vat and excise duties. Both Vat and excise duty receipts were well behind target in March, with Vat being 3.4pc off the mark and excise duties 5.5pc.
So if our economic growth is for real why isn't it feeding through into stronger consumer spending? Where has all the extra money generated by more jobs and higher wages gone?
Some of the reasons for the failure of economic growth to feed through into stronger retail spending, which accounts for a third of all consumer spending, are already well-known. These include the rise and rise of online retailing, with an estimated 75pc of the orders that Irish consumers place online being fulfilled by overseas retailers.
The Central Bank estimated the value of online sales at €9bn in 2015. This compares to total retail sales of about €30bn.
An increased willingness to shop online has been part of a greater shift in consumer behaviour since the crash.
"Patterns of consumer spending changed radically during the recession. The focus is now on value. People are shopping around. They are doing that in food as well as in other categories," says Tara Buckley, director-general of RGDATA, which represents independent grocery retailers.
Retailers also point to faltering consumer confidence in wake of last June's UK Brexit referendum, something that was borne out by recent KBC/ESRI consumer confidence index figures, which showed that consumer confidence is still well shy of the post-crash highs recorded in late 2015.
But there is also another factor influencing consumers that retailers are only gradually becoming aware of: residential rents. Rents rose by a massive 13.5pc in 2016 and are now up by 50pc since their post-crash trough in the first half of 2012, according to property website daft.ie. In fact, average rents are now 8pc higher than they were at their pre-crash peak in early 2008.
Average Dublin rents now range from €1,375 a month in north Co Dublin to €1,855 in south Co Dublin while average rents in the surrounding commuter counties exceed €1,000 (Meath) and €1,100 (Kildare and Wicklow).
With the 2016 census figures showing that the home ownership rate is now at its lowest level since 1971 and that renting is more common than ownership among households consisting of people aged under 35 - a fifth of all households are now in the private rented sector - these extremely high rents consume a very high proportion of tenants' incomes.
The average south Co Dublin rent is the equivalent of 66pc of the average gross (ie, pre-tax) private sector income and 46pc of the average public sector income. Even someone renting in Co Meath, where the average rent is "only" €1,040 per month, would end up paying 37pc of the average private sector income or 26pc of the average public sector income.
The proportion of renters' disposable or after-tax income going on rent is of course even higher.
The latest consumer confidence index provides strong circumstantial evidence that rents are hitting sentiment. This shows that consumer confidence is much lower in Dublin than in the rest of country. Coincidence or something else?
This fall in consumer confidence in Dublin has retailers worried, with RGDATA's Buckley pointing out that, while retail spending had partially recovered in and around Dublin in recent years, it still remains at very depressed levels in many areas outside of the capital.
In a strategy document published last month, IBEC's Retail Ireland offshoot analysed the emerging disconnect between economic growth and retail sales - the volume of retail sales is back to 2008 levels but the value of retail sales is still 13pc below pre-crash levels. After examining the usual steps it then went on to observe that "rising housing costs, for example, account for an increasingly large share of consumer spending - and show no signs of abating".
IBEC is forecasting that the value of retail sales will increase by between 2pc and 2.5pc a year between 2017 and 2020 if Brexit has only a "modest" impact and by 1.8pc in 2017, falling to just 0.7pc by 2020, if Brexit has a "significant" impact. These forecasts indicate that the previous strong link between economic growth and retail spending has been broken. "Rents rose by over 10pc last year. Consumers are having to reallocate resources," says Retail Ireland director Thomas Burke.
He says that, after a "reasonably OK" January, his members experienced tough trading in February and March. However, while retailers have been getting it in the neck from rising rents, the night-time economy, including pubs and restaurants, seems to holding up better.
"The real squeeze," he says, "is in retail."
That should be a concern to the Government. Retail employs up to 280,000 people, generates approximately one-eighth of all economic activity and contributes about €7bn in annual tax revenues. Retail matters, a lot.
The pain being suffered by retailers is just one of the ripple effects of our extremely high residential rents. Other likely impacts include upward pressure on pay as tenants take advantage of a dwindling labour supply to recoup increased rent costs from their employers. With demand continuing to outstrip supply, rising rents have the potential to inflict far more damage on the economy before the cycle turns.
Sunday Indo Business