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Home truths: Rent control 'bomb' damage for big cities

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A disused building in New York: Rent controls caused districts of the city to become run down in the 1960s and 1970s

A disused building in New York: Rent controls caused districts of the city to become run down in the 1960s and 1970s

A disused building in New York: Rent controls caused districts of the city to become run down in the 1960s and 1970s

A frustrated would-be tenant posted on Twitter last week the unorthodox contractual details she received about a rental property she was interested in.

The monthly rent was listed as €1,460.

The landlord required a deposit of €1,460 (this is normal) but also a "car space" payment of €2,080 and a "management fee" of €1,600. This amounts to €6,600 sought up front. The sort of money a previous generation paid for a mortgage deposit.

Charging separately for car parking has been an irksome issue which would-be tenants have often encountered these last few years but an effort to charge the tenant for the management is a new twist in the ongoing rental horror story.

But landlords are not all badasses. Through the last two decades, most have been small holders who owned between one and three properties. They have typically fallen into three categories: (a) invested in a house instead of a pension (b) rural based and bought for their children's college years or (c) they are "reluctant" landlords - who bought small in the boom and got trapped in negative equity. Starting families, they outgrew their homes. So they rented a larger property while renting out their own smaller home to someone else. They pay more rent than they take in.

All are taxed at 40pc on rental income and have maintenance costs. Increased tenants rights mean it can take a year and a half to get a non-paying/misbehaving tenant out. Finally, there's the recently extended Government rent pressure zone (RPZ) caps.

Caps have particularly trounced the 'nice' landlords who didn't increase their rents over the years and ended up getting punished for it by having their income pinned well below market rates for the foreseeable future.

Recently as rising values took increasing numbers of reluctants out of negative equity (or close to it) they've been getting the hell out of Dodge. Only in Ireland can it be a bad place to be a both a landlord (big funds excluded) and a tenant simultaneously. Even with today's high rents. It's proven by data showing at least twice as many are selling up than buying in. A report by the Owen Reilly agency last month showed that 75pc of those who sold property in the Dublin Docklands region last year were small landlords.

Now as we run into an election, Sinn Féin is presenting us with the option of a blanket rent freeze, while the incumbent stands by rent capping.

But the thing is this, rent caps and freezes wreck neighbourhoods. Yes they can certainly buy a Government time in the short term, while it attempts to drum up more supply, but in the medium to long view, they are destructive.

In the absence of proper supply of homes affordable for average and low incomes (Sinn Féin is at least promising a huge building programme in tandem), the signs are that we've already run out of short-term benefit time when it comes to rent caps. How do we know? Well it starts with charging extra for parking.

First off, the "honest" landlords who obey the letter of the law (and generally the most decent to tenants) are the ones who get out first as the balance is tipped against them. The less scrupulous sorts will try to get around caps/freezes by insisting on extra payments which are not counted strictly as rent. First comes fees for car parking spaces. Next comes more tenuous charges like management fees and finally, comes key money, whether legal or illegal.

Key money was long an accepted, above board and widely deployed aspect of the Irish commercial lettings market, particularly in retail. Properties which had their rents fixed on very long leases (30 or 60 years) inevitably resulted over time to tenants paying sub market rents. To compensate for this, landlords (or indeed sub-letting tenants) began charging a once-off payment designed to compensate. So someone renting a shop off Grafton Street might agree to €80,000 per annum but also make a one-off key money payment of €130,000. The more out of whack the rent was with the market, the higher the key money sum paid.

Today retail estate agents might already view the combined €3,680 parking and management charges mentioned earlier as key money by a different name. It starts here.

In a market like Dublin's where supply is tight and caps and freezes are deployed over years, landlords who feel they are being screwed (whether they are or not) will invest less in the upkeep of their properties. This leads to the running down of whole areas which are high in rental homes. It happened in New York in the 1960s and 1970s.

In cities where residential rents have been fixed over long periods (New York again) key money becomes a sub cultural fact of life and an expected under the counter payment by a prospective tenant to lighten the loss for the landlord/bribe the landlord's agent/ultimately get that tenant into the property ahead of the competition.

This is why the rent caps imposed by Fine Gael and freezes proposed by Sinn Féin cannot work and can only do damage in the absence of proper supply. Ask any economist, left or right wing.

In his study Rent Control and the Rental Housing Market: New York City 1968 Paul Niebanck showed that 29pc of rent-controlled housing was in a state of deterioration compared with just 8pc of uncontrolled housing. Joel Brenner (London School of Economics, now with Massachusetts Institute of Technology) came up with similar findings for the UK. Studies in France brought the same results.

For the socialist view, try Gunnar Myrdal, architect of Sweden's welfare state and Nobel Economics Prize winner who said controls constituted "the worst example of poor planning by governments lacking courage and vision". Fellow Swedish economist and social democrat Assar Lindbeck exclaimed: "Rent control appears to be the most efficient technique presently known to destroy a city - except for bombing."

How many times? We need. Lots of truly affordable new homes. Fast. End of.

Indo Property