Tuesday 20 February 2018

Rent control only makes a bad situation worse

The move towards rent regulation has had the opposite effect to that intended, argues Annette Hughes, as the latest figures show further rent increases

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Click to enlarge

Annette Hughes

The challenges facing the housing market are complex. 'Dysfunctional', 'crisis', 'market failure' and 'emergency' - this is the language increasingly used to describe the sector and there has certainly been a lot of discussion and analysis. It is almost four years since house price inflation resumed in Dublin, the economy and jobs market have experienced a remarkable turnaround, and still building commencements remain well below sustainable levels and progress on the restoration of a properly-functioning market is slow.

It is not news that supply constraints remain in our main cities, despite evidence of significant pent-up demand. There is the escalation of homelessness - 6,500 people trapped in emergency accommodation, 2,348 of them children - and many households have significant outstanding mortgage debt, amongst the highest in the euro area. The issue of rapidly rising rents is also serious. Moreover, there has to be something inherently wrong in a market where rent payments in Dublin are higher than mortgage payments.

Some might argue that the real crisis is in the private rented sector. This is because, since the economic crisis, the private rented sector has been providing housing for a wide range of households, many of whom would previously have had their accommodation needs met by the owner occupied or social housing sectors. The sector is accommodating those households who have postponed house purchase for many reasons, as well as those who have lost their homes because they have fallen behind with mortgage repayments. The sector also provides homes for those whose rents are paid for by the State as well as other vulnerable groups whose needs are not best catered for in the private rented sector. Others relying on the sector include students and, of course, those who are renting by choice. As a result, the demands on the sector have increased substantially since the financial crisis.

Around 704,000 occupants in tenancies are registered with the Residential Tenancies Board (RTB), almost 15pc of the population. Indeed these figures probably understate the real number as, according to the 2011 Census, one in five households were renting in 2011 and Census 2016 figures will not be published until early next year.

In our comprehensive assessment of the private rented sector in 2014 for the RTB, we as DKM Economic Consultants (along with the ESRI and Ronan Daly Jermyn, supported by surveys of tenants, estate agents and landlords by Red C), set out 34 options for ensuring a sustainable private rental sector over the long term. A number of these options aimed at addressing rent stability were contained in the package of measures introduced by the last Government in November 2015. These included the longer notice period of new rent for landlords, the provision of notification of a new rent by the landlord to the tenant and the RTB, and a longer notice period for tenancy terminations.

Our rationale at the time was that the tenant would be better informed and more protected and landlords would be required to set rents based on the quality of their accommodation and comparable properties in the area.

The most contentious measure brought in by the Government, however, which was opposed in the DKM analysis, was to extend the rent review period from 12 months to 24 months, which was essentially a form of rent regulation. It gave a tenant certainty about the level of rent they would pay over a two-year period and with a 90-day notice period. Specifically, the DKM et al research concluded that the theoretical justification for any form of rent regulation was relatively weak, not least because it can act as a disincentive to supply and discourage the entry of small and large scale investors. Perversely, the research concluded that the impacts could fall disproportionately hardest on the very people that the measure was trying to assist.

Rent reviews now happen every two years but, of course, rent reviews for the population of tenants are happening all of the time. Introducing this form of rent regulation brings the risk that when a lease is renewed or when a new tenancy begins, landlords may increase the rent above the market rent to compensate for having received a lower rent during the tenancy. It may be no coincidence then that rents, according to the RTB Rent Index, across every house type nationally were up by close to 4pc and by around 5pc in Dublin in the second quarter of 2016 on the previous quarter.

In July, the Government raised the maximum Rent Supplement limits by more than 25pc across most councils, a move that is likely to drive rents even higher in a supply-constrained environment. As many Rent Supplement tenants live in urban areas and are concentrated in certain places within those areas, a more targeted approach such as assessing need on a case-by-case basis by extending the Interim Tenancy Sustainment Protocol might have been more appropriate.

Looking at Daft.ie figures, pictured right, there are around seven counties where the average monthly rent for a three-bedroom house is less than €600. This is less than half the corresponding average monthly rent in west Dublin, for example. A more flexible and targeted arrangement for where the problem is most acute might have had a lesser impact on market rents and on the Exchequer.

There is a proposal in the new Housing and Homelessness Action Plan to introduce annual rent reviews and to link rent reviews to the consumer price index. This option allows annual rent increases to keep pace with inflation, but with inflation at almost zero, this would generate poor returns for landlords faced with high operating costs, especially those coming to the end of interest-only mortgages. Where supply is tight, this one measure could potentially reduce the supply and quality of rented accommodation.

The Government has committed to publishing a strategy for the rental sector before the end of the year. The focus is to be on security of tenure, standards, supply and services. In regard to security of tenure, a long-term tenancy provides an element of certainty for families and others wishing to rent rather than buy. The DKM et al report proposed moving from the arbitrary Part 4 four-year tenancy towards an indefinite tenancy arrangement of, for example, seven or more years, the terms and conditions of which would be agreed by the RTB. In such situations, the rent would be subject to the normal rent review period and would revert to market rent at the end of the period.

Another issue is the standard of rental accommodation. There is a legal obligation on landlords to ensure their properties comply with existing legislation on standards for rented housing and enforcement of these standards rests with local authorities. However, inspections can be very labour intensive and so one solution to ensure compliance would be to introduce a standards rating system similar to the NCT system for car owners. This would place the onus on landlords to produce a certification of compliance every three years that would cover the full list of items included in the housing regulations. Such a system would ensure a sustained improvement in the quality of the rented housing stock.

It's acknowledged widely that the solution to the housing crisis is more supply as soon as possible, however, the industry tells us that residential development is not viable. Both construction costs and non-building costs need more scrutiny. The longer the building of more housing remains unviable, the more the lack of residential units is exacerbated by the economic recovery, returning emigrants and an increase in short-term lets as some landlords take their properties off the market. Given this situation, the proposal mooted this week to give tax incentives to returning emigrants to lure them back to Ireland would increase the demand-supply imbalance and only serve to push rents up further. Once again, the impact would be hardest on the more vulnerable households at the lower end of the private rental market.

But there is light at the end of the tunnel as the Action Plan initiatives aimed at increasing the rental supply, like the Affordable Rental pilot scheme, which is due to be finalised shortly, and the Build-to-Rent scheme, which is intended to target the supply of large-scale rental developments by professional landlords, should boost rental supply, depending on take-up.

There is also talk of an off-balance sheet housing investment vehicle being established by the NTMA in conjunction with the private sector, which would fund the delivery of private housing for rent and social housing. This has the potential to deliver 5,000 units over a five-year period, but it is expected to be early 2017 before it is established, implying end 2017/early 2018 before any units would be delivered. It therefore seems housing and its challenges will remain at the top of the political agenda for some time to come.

Annette Hughes is a director of DKM Economic Consultants; for access to the RTB reports referenced on 'Rent Stability in the Private Rented Sector' and the 'Future of the Private Rented Sector', see dkm.ie

Sunday Independent

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