Ticking time bomb of our rental crisis
Tax breaks are needed to help increase supply in the housing market, writes Philip Farrell
The Irish rental market is a ticking time bomb akin to a Bond film, rolling down to zero. But in this instance there will be no 007 to save the day.
We now have a situation where an ever-increasing 34pc of the Irish population are renting, some by choice, most by necessity. There are currently fewer than 3,000 properties available to rent in Ireland, just 0.15pc of the total housing stock. Demand is at least four times that level. Rental values have increased more than 65pc in some urban areas over the last four years.
Currently, fewer than 5pc of newly constructed homes are being bought by investors. At the height of the Tiger's roar, this figure exceeded 45pc.
So where are these rental properties going to come from? Take a regional town of 5,000 people. A town of this nature would have a demand for at least 200 privately rented properties. Who is going to service this market in the future? Due to its fragmented nature, it holds no appeal for the large investor. Most one-off investments are now purchased with cash. Servicing a loan at rates north of 4pc is simply a non-runner, in addition to paying income tax, USC, LPT and increasing RTB compliance costs.
What this means is that the only real potential upside for the investor is capital appreciation, but values have increased by up to 50pc in many urban areas over the last four years, which will make investors more cautious.
The Government recently announced it had exceeded the 2017 target by housing 23,000 people. The devil is in the detail - delve a little deeper, and fewer than 1,000 new social homes were built in 2017 with a further 500 provided through Part V.
Many people have little or no sympathy for landlords, believing they played an integral part in both inflating house prices during the 2000s and the subsequent crash. Herein lies the problem. With property values currently increasing 10pc per year, additional homes must be provided for the increasing number who cannot afford or secure a mortgage, or the ever-increasing number who simply choose to rent.
It is a responsibility of Government to provide housing for those who cannot secure a home. Our current rulers, in their wisdom, decided after the crash that the private sector would deliver the homes needed. This was never going to happen. An industry which had been forced to take a long lunch - six years - was always going to take some time to reinvent itself. On top of this there is the archaic planning process to contend with. The construction industry has returned to growth, but only in the large urban areas where values are now making it profitable again to build.
Rebuilding Ireland was launched in mid-2016 by the Government to much fanfare. While it can be applauded for success with the Help to Buy Scheme and the introduction of fast-track planning permissions, it has failed to deliver in a number of areas. At one point, 'modular housing' appeared to be the answer to all our prayers! This was short-lived. The recent announcement of the home purchase scheme through county councils should be cautiously welcomed as it will only assist a small percentage of home buyers. Also, a note of caution: historically, similar type schemes have proved to accrue arrears issues.
Rent controls have had varied success internationally. It is too early to say how they have fared since their introduction here in December 2016, but they do not seem to have stemmed increases in average rents. A downside is that they have punished many landlords who had a good relationship with their tenants, and this was reflected in the agreed rent. Many of these landlords are now leaving the market as they cannot legally charge the market rent once they are placed in one of the 21 electoral Rent Pressure Zones.
Solutions? Two areas of focus: the supply side and the taxation side. As is now happening in the UK, the Government must attract back the smaller buy-to-let investor.
Our cities will be well-served by professional investors like REITs and pension funds for decades to come with large built-to-rent type developments comprising hundreds of rental properties in desirable areas. What about the regions? Incentives for the small-time investor should include lower income tax from rental income, extra allowances for capital expenditure and reduced CGT on exit, which currently stands at 33pc.
On the planning side, the level of social housing in Ireland currently stands at 10pc of the total housing stock, with a further 24pc of residential homes privately rented. This figure is higher in cities. In addition to Part V, introduce a requirement that 10pc of the total number of units in new developments must be sold to private investors. Currently, investors cannot compete with the FTB for starter homes. For the FTB, this is to be welcomed, but for those requiring somewhere to rent, it is limiting options.
Some would claim this move would just increase pressure on the FTB. To alleviate this, housing densities could be increased by one unit per acre, for a limited period.
The rental market needs rental properties or else it is just a market. People need to recognise that landlords play a fundamental role in the property food chain and those who find it hard to accept will need to accept them as a necessary evil.
Philip Farrell is a market commentator and property consultant