Sunday 18 August 2019

Pat Davitt: 'Paying rent in retirement is a train wreck waiting to happen'

Ireland's outflow of wealth from individuals to institutions will drive new wave of homelessness

Home ownership in Ireland declined from 69.7pc to 67.6pc between 2011 and 2016, according to Census figures. Stock photo
Home ownership in Ireland declined from 69.7pc to 67.6pc between 2011 and 2016, according to Census figures. Stock photo

Pat Davitt

The housing market in Ireland is changing rapidly. These changes involve a transformation in the ownership of wealth, from individuals to institutions, via ownership of residential property. If we don't arrest this trend, our nation of 4.8 million people will become increasingly poorer, and in hock to institutions, many foreign owned. And it will drive a new wave of homelessness.

This is not only an Irish phenomenon; the UK, too, shares many of the same changing characteristics. Amsterdam is seeking to ban buy-to-let on new build homes and in Germany, Berlin is revolting against big private landlords.

While the factors at play involve global finance, we do have the power to control what's happening. It will only change if policy makers are pressurised to stop this very corrosive trend.

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Home ownership in Ireland declined from 69.7pc to 67.6pc between 2011 and 2016, according to Census figures. If this trend continues, it will reach 61.3pc by 2031, a dramatic drop from the peak of 80.1pc in 1991.

There are many studies that point to the value of home ownership. Even those that claim otherwise acknowledge that renting over buying works only if the renter invests savings rather than consuming them.

The reality is the discipline of saving for a deposit and the enforced saving by paying down a mortgage each month is difficult to match by renters.

Home ownership, acquired through mortgage finance, was primarily how our parents and grandparents accumulated wealth. At pension age, the mortgage was paid off and they owned the property. They claimed their pension and continued into retirement with their offspring later inheriting the property.

If the current new trend prevails, homes will be owned largely by investment institutions, leaving nothing to hand on to children.

More importantly, parents will remain paying rent into retirement, many with only the State pension to support them. This pension is based on the assumption that people don't have significant rent or mortgage commitments. There is every risk that they will become the new homeless. Their children, if they are in a similar situation, will not be able to help.

The tragedy for the current younger age cohorts is that they may be close to middle age by the time they realise the magnitude of their predicament.

Many, too, quite apart from the difficulty of saving for a deposit while renting, fear getting burned like their parents did in the property crash.

And they've received negative messages about home ownership from policy makers. In November 2014, the then chairman of the Housing Agency, which advises the Government, told a TV3 (now Virgin Media) documentary when asked about the perception that many view rent as 'dead money': "Well I'm the chairman of the Housing Agency and I will never buy a piece of property again, I rent."

When Rebuilding Ireland, the Government's housing strategy, was published in July 2016 it highlighted two countries, Germany and Switzerland clearly implying that they were models Ireland should aspire to.

Amid concerns that the plan appeared to set out a policy agenda of encouraging rental over buying, the Institute of Professional Auctioneers and Valuers (IPAV) wrote to then Minister for Housing, Simon Coveney, advising him that such a policy could have severe unintended consequences in years to come, particularly for those in their 20s and 30s.

While institutional investors, many foreign-owned, currently thrive, the RTB (Residential Tenancies Board) Rent Index for Q3 2018 found there were 1,778 fewer landlords than three years previously and tenancies had declined by 8,829.

Speaking to RTE on the report, RTB director Rosalind Carroll made the point that "institutional landlords are not going to provide housing outside of Dublin or in rural areas".

A new study by the Department of Finance in the last month, 'Institutional Investment in the Housing Market', says government policy is one of "tenure neutrality".

I would have to question that. If the impact of overall government policy is a more favourable environment for institutional investors in housing over both private landlords and individuals, then government policy is not tenure neutral. Government has the levers to change that, should it so decide.

A claim within the report I would take issue with, is that when house and rental price inflation did not result in a supply response it was a "market failure". It was primarily a policy failure that choked off recovery in the building sector, including the operation of Nama and the excessive use of vulture funds.

In this regard last week's comments from UN special rapporteur Leilani Farha echo what IPAV has warned about for several years - the consequences of Nama selling off properties to such funds at knock- down prices and then giving these same funds tax relief. Latterly new properties bought by such funds are exempt from the Rent Pressure Zone controls, and will remain so.

The same Department of Finance study does acknowledge a risk IPAV has pointed to for some time - that of institutional investors gaining monopolistic power.

It acknowledges: "Although as yet unproven, there is a risk that at sufficient scale an institutional investor or group of investors could, over time, develop monopolistic or oligopolistic pricing power."

The study also acknowledges that institutional investment is unlikely to have a direct impact on increased affordability.

Overall, the view seems to be while large-scale landlords hold 4.6pc of all tenancies nationally, the risk is not there yet.

It does say that if buy-to-rent investment continues at current growth rates, market forces would over the long-term create "socio-economic polarisation in some urban areas".

I would contend we are well on our way to that eventuality. Rent levels into the future will be decided in Canada, the US and elsewhere.

We have already set the conditions for the next new wave of homelessness.

We must act now to stop this crazy train wreck. The Financial Times recently reported on a campaign to expropriate the city's biggest landlord, Deutsche Wohnen, and take its 110,000 flats into public ownership, as rising rents fuelled anger.

The Government can decide right now to change national policy to favour home ownership for those who desire that option, and also ensure sufficient rental accommodation to meet demand, including that of foreign workers in Dublin in particular.

Such should not be beyond us. However, it will involve decisions not previously faced up to, including the high cost of development land, turgid delays in the planning system, the high cost of finance for SME builders in particular, and equal treatment for private landlords with commercial landlords.

Pat Davitt is chief executive of IPAV, the Institute of Professional Auctioneers & Valuers

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