An Analysis of the Irish Residential Rental Market

Contents

What is the Current Situation?

Source: Daft Q2 2019 Rental Report

The above graphic from Daft’s Q2 2019 Rental Report says it all really: availability of properties to rent has never been lower and rents have never been higher. Something has gone wrong. In fact, many things have gone wrong.

There are currently 10,338 homeless people in Ireland made up of 3848 children and 6490 adults. These are not people sleeping rough but rather in emergency accommodation such as hotels, b&b’s and hostels.

Source: Peter McVerry Trust

In terms of those sleeping rough, by its nature, exact figures are difficult to come by. However, the below graph from the Dublin Region Homeless Executive gives a good gauge of the levels of those sleeping rough in Dublin on any given night.

A side point here is that typically these people have complex, entrenched mental health and addiction issues that the mere provision of accommodation will not remedy. Hand the keys of an apartment to a severely addicted person and he will not dutifully sit down to update his CV, apply for jobs, gain employment, re-enter the labour market and become a tax-paying, functioning member of society. To see someone sleeping on the streets and conclude that this is a symptom of a housing shortage is analogous to seeing a homeless person with poor dental hygiene and concluding there is a shortage of dentists.

There will always be a cohort, typically referred to as “the most vulnerable in society” who, regardless of the amount of homes in the State, will find their way onto the streets as their multi-faceted issues cause them problems well beyond access to accommodation. These people are as much a medical problem as they are a housing one. Predictably however, when a homeless person dies on the streets, the Twitterati attack the housing minister en masse.

Source: Focus Ireland

For example, in October 2019, a homeless man was tragically beaten to death near an encampment of homeless people at the Mardyke Walk in Cork. The usual sensationalists big on hyperbole and small on facts seized the opportunity to slate the government and Eoghan Murphy in particular. It later emerged that the man had been provided with State funded accommodation and a host of wraparound services. Despite this, his death was portrayed as a failure of the housing minister. It simply wasn’t.

Similarly, a homeless Eastern European man tragically died in Dublin in October. As usual, the same voices were out: Murphy the Murderer etc. It later emerged that the man died of a drug overdose. This was the tragic case of an Eastern European man coming to Ireland to presumably endeavour to partake in our strong economy. Obviously those plans went awry somewhere along the line but this wasn’t Eoghan Murphy’s fault. Someone dying on the streets of an overdose would not be solved by more houses. Those who choose to take drugs run the risk of overdosing.

The point here is that the “homeless person dies on street = there is a lack of housing” rationale generally isn’t accurate. It’s more complex than that.

That being said, Dublin now only ranks below London, Moscow, Zurich & Geneva in Europe’s most expensive cities. Our goal must be to push away from these top positions & make the country a more affordable place to live for all.

Source: www.eca-international.com

How Did We End Up Here?

We’re a Victim of Our Own Success

It is worth noting that the demand for housing is, in part, driven by the fact that we have net migration to the country over 34,000 people per annum. This is the result of a strong economy that has meant that Irish people don’t need to emigrate to find jobs and people from around Europe and beyond choose to make Ireland their home owing to the opportunities and quality of life that we have to offer, notwithstanding the housing issues we clearly do have.

The growth in the Irish economy post-bust took everyone by surprise. It seems incredible that just seven years ago, the unemployment rate was 16%. We are now at pretty much full employment. That is an incredible turnaround. This growth has strained many facets of our society from traffic to hotel rooms, education, health and obviously accommodation. A strong economy causes growing pains as well as benefits.

Source: www.tradingeconomics.com | Central Statistics Office Ireland

Irish unemployment rate has collapsed as the economy recovered.

A quick way to solve the housing crisis would be for the economy to crash & for the release valve of emigration to ease the pressure on housing as thousands leave the country, as they did during the last recession, with the associated mental anguish that goes with that. Tens of thousands of people leaving Ireland and tens of thousands more not coming here due to a lack of opportunities would quickly free up a lot of housing stock and the rental market would quickly adjust downward. Obviously that’s no one’s desired solution. We want our best & brightest to stay in Ireland & to go on attracting talent from around the world but we also want to be able to house them affordably.

Source: CSO – Net migration turned to net immigration as fewer Irish left, the Irish abroad returned & more non-nationals made Ireland their home

In addition, our population is naturally increasing by about 30,000 per annum as people live longer and are choosing to have and raise children in Ireland. So on a net basis, we added 52,900 and 64,500 to the country’s population in 2017 and 2018 respectively. The average Irish household size is 2.7. To cater for this new demand required 19,592 units in 2017 and 23,888 in 2018. To put this in context, we built just over 4500 new units in 2013 as the decimated Irish construction sector struggled to ramp up to meet demand.

Source: CSO Ireland

Fewer people per household means we require more houses than ever before.

Adding 52,900 and 64,500 net people to the country in 2017 and 2018 alone strained the country’s ability to house its population.

More people competing for rental properties drove prices upwards.

So, when framing the debate, of course one should be critical of government failings but in the interest of balance, one should acknowledge that the government’s success in righting the economy has contributed to the current problems.

Who Can’t Afford to Home Themselves in Ireland?

Below is a breakdown of those homeless on census day in 2016. Numbers have doubled since then but it still provides a useful insight.

899 of the 5212 (17%) are working but homeless. One would hope that these people are in a temporary situation and will be able to secure private rental accommodation on the basis that they are at work, earning money and so in a position to secure accommodation at some level.

Those looking after families, retired or unable to work due to sickness or disability should be prioritised for social housing as these are the most vulnerable in society and simply cannot afford to accommodate themselves or their families.

Below is a table showing unemployment numbers for Ireland in September 2019.

Source: CSO Ireland

Unemployed people are obviously unable to accommodate themselves and so are in need of assistance. However, a delicate balance needs to be struck here to avoid moral hazard. If a fit and healthy person in the current economic climate is long-term unemployed (over one year), then questions have to be asked as to how seriously they are looking for a job. This cohort should not be prioritised for social housing as to do so could disincentivise those working hard to house themselves and their families. Seeing a long-term unemployed person being handed the keys to a new property would be utterly demoralising for someone working hard to pay their way. Those of working age, fit and able to work, should be housed in temporary accommodation and provided every support to return to work. But as a State, we can’t give taxpayer funded properties to those who could at least partially pay their way. There must remain an incentive to work and a disincentive to remain long term unemployed. Encouragingly, those who chose not to work in Ireland is a very small part of the labour force. As of Q4 2018, the figure of long-term unemployed stood at just over 2% of the workforce or just over 50,000 people. These people should be given every assistance to re-enter employment but should not be prioritised for a free house.

We’re Actually Not Short of Houses – They’re in the Wrong Places!

Housing Versus Population Growth

Source: CSO Ireland

In 1991, according to CSO data, we had a housing stock of 1.16m units serving the housing needs of a population of 3.5m. This means that there was one property for every 3.03 people in the country. By 2016, the housing stock, having been substantially added to during the boom years of the Celtic Tiger, had swelled to over 2m while the population had risen to 4.7m. This implies one house for every 2.37 people in the country. So the house to person ratio is actually considerably better now than it was in 1991.

Source: CSO Ireland

On census day in April 2016, there were 183,312 vacant properties in the country. On the same date, there were 6000 homeless people. This imputes 30 vacant houses for each homeless person.

Source: myhome.ie

In MyHome’s Q3 2019 report, they report that there 24,000 properties for sale in the country.

So there isn’t a physical shortage of housing in the country. We have more than enough to house the current population. There isn’t a housing availability problem; there is a housing affordability problem for low income earners and the unemployed. Of course, not all of these properties are located in places that people want to or can viably live. If you are working in a factory in Ringaskiddy, 40 empty houses in a ghost estate in West Clare is of little relevance to you.

However, a couple both earning the average industrial wage will qualify (without any exemption) for a mortgage of €273k assuming 3.5 times salary. This imputes a budget of circa €300k to buy a property allowing for a 10% deposit. The government will give a tax rebate of €15k (or 5% of purchase price) via The Help to Buy Scheme if it’s a new property. At the time of writing, there are over 18,000 properties nationwide on Daft.ie with an asking price of €300k or less. There are 1500 in Dublin, 415 in Cork and 215 in Galway. You have a healthy selection of properties to choose from and vendors are eagerly competing with each other to get your offer. There simply isn’t a shortage of properties to buy if you can earn the average industrial wage. It is not the case that large swathes of people with €300k to spend are looking for properties but none physically exist. Of course, not everyone can earn the average industrial wage and we will discuss this further below. Saving a deposit in a high rent environment is also very challenging so we pose the idea of private lenders lending deposits to proven renters later in this article.

The Government Doesn’t Care and Is Sitting on Its Hands?

The narrative disseminated in some parts of the media and political discourse is that the government has no interest in the housing crisis and is doing nothing to solve it. Even a cursory analysis shows that this is simply not the case. It would be ludicrous to suggest that any government isn’t interested in solving such a politically damaging issue.

Positive Measures the Government Has Taken

  • The overall housing budget is €2.4bn per annum – this is the highest ever in the history of the State
    • That equates to approximately the entire income tax take from 300,000 workers on the average industrial wage. These people are paying for their own accommodation but also subsidise the accommodation of their fellow citizens who can’t house themselves. This is a massive investment and a huge show of solidarity from those working and paying rents/mortgages to those who can’t pay for their own accommodation.
  • Dublin City Council spends approximately €150m on homelessness services per annum.
  • Cork & Kerry Homeless Spending was €11.5m in 2018.
  • The bulk of the spending is on emergency accommodation such as b&b’s, hostels and hotels.
    • This is wasteful and would be much better spent on building houses. Paying hotels to keep a roof over people’s heads is uneconomical. It’s much more cost-effective, in the long run, to build the properties than to rent hotel rooms. The government knows this and is acting on it.
  • Introduced RPZs
    • In an aggressive restriction of the property rights of Irish citizens, the government introduced draconian legislation restricting the rent that a landlord can charge for his/her property. As an estate agency at the coalface, we can attest that RPZs are effective in keeping a lid on rent inflation so this measure has had an impact. Without RPZ’s, rents would be higher.
  • Short-term Rental Restrictions
  • Vacant Site Levy
    • This levy is designed to punish the hoarding of land and offer the stick of a tax to force land-owners to use their land-banks to provide housing.
  • Rent a Room Scheme
    • Those with excess capacity in their homes can rent a room in their property tax-free. This offers a carrot to those lucky enough to have spare rooms to put them to use.
  • Created the Environment to Encourage Construction.

This is perhaps the number one thing that a Government must do to solve a housing crisis. The most effective antidote to a housing crisis is a steady flow of new supply onto the market. As supply catches up with demand, prices cool and affordability improves; this has already started to happen with price drops in parts of Dublin. The Help to Buy Scheme has played a key role in helping first time buyers get their deposit in place as it essentially provides them with half of the 10% deposit they need; this is very much needed for those struggling to cobble a deposit together while paying high rents. In most cases, their mortgage payments will be less than the rent they pay so helping them with the deposit in the form of a tax rebate (not a grant) up to 5% of the purchase price of a new property makes a lot of sense. The government extended this scheme in the 2019 budget and that is to be welcomed.

This demand creates an incentive for builders to deliver the supply to satisfy it. As below, completions of new builds have increased every year since 2013. Above all else, if this level of supply can be sustained, and the expectation is that it will be as there are now large scale, well capitalised, well-managed construction companies (Cairn, Glenveagh, O’Flynn et al) operating in Ireland, supply will start to meet demand and the housing crisis will start to be solved. As long-term renters finally can afford to buy properties, they will leave the rental sector which reduces the strain on it and push rents downward. This hasn’t started to happen yet but if supply can be maintained at over 20,000 units per annum and supplemented by circa 5,000 social houses each year, rents will inevitably ease.

Source: CSO Ireland

Where Policy Has Failed

The decision by successive governments to outsource the housing needs of the most vulnerable in society to the private sector has not worked well. Building just 75 social houses in 2015 was utterly unsustainable and a spike in homelessness was predictable at that level of output.

The government has acknowledged this and has put ambitious targets in place to ramp social housing construction up over the coming years. This is a crucial part of the government’s plan. Alas building new units takes time but this plan is underway, budget is allocated and if the government delivers on its objective to build over 23,000 units between 2019-2021, homelessness can only but fall dramatically as this is a level of social housing construction not seen in the last 20 years.

Solutions

Countries have solved far more challenging problems than how to house their populations. This crisis is eminently soluble. In this section, we outline the measures that we feel would alleviate and ultimately solve the crisis.

Private Funding of Deposits

The massive rents that tenants are being forced to pay at present have meant that a large cohort of people who, in normal circumstances, would have long since bought and moved out of rental accommodation have got stuck. They are stuck because each month they are paying 30-40% and even more of their disposable income on rent. In this context, saving a booking deposit simply isn’t possible. Consequently, there is a large segment of the market who are bankable, creditworthy people, with solid jobs paying considerably more in rent than the cost of servicing a mortgage in like for like accommodation. The inability of these people to escape the rental sector is like a pressure cooker with no release valve; the pressure keeps building & building driving rents higher & higher. We need the release valve of these people being able to move on with their lives, buy new properties and release the pressure on the rental sector.

While some are lucky enough to get loans from the Bank of M&D (Mum & Dad) and others move home for a year or more to save their deposits, many aren’t so lucky and are stuck in an insoluble situation. Our solution is to allow private risk capital to lend deposits to these people at commercial rates. Such lenders would take a mortgage on the new property which would be subordinate to the charge taken by the senior lender (the bank providing the bulk of the mortgage). Rates would of course be higher than those on offer from the banks lending the main part of the mortgage to compensate the lender for the fact that they are funding the riskiest tranche of the debt. In the event of default & repossession, these lenders only get paid after the main bank is repaid in full; this ensures no systemic risk in a downturn. Even allowing for this higher rate, borrowers will be paying less each month than they had been paying in rent. Such mortgages would only be allowed for new builds as a tenant buying an existing property and displacing its occupiers does nothing to solve the problem – we must stimulate construction & purchase of new properties.

But we’ve tried this before and we saw what happened! No doubt 100% mortgages are weapons of mass destruction if used incorrectly. However, if used prudently, they can help to stimulate demand for new houses, which builders will build and remove large swathes of people from the rental market who traditionally would have left it a long time ago in the normal course of events. The following conditions would need to be imposed by the Central Bank:

  • Borrowers must have a track record of 24 uninterrupted months of paying rent
  • The combined mortgage repayments (from main bank and non-bank deposit lender) cannot exceed the rent that was being paid by the borrower ie they have demonstrated affordability
  • 3.5 times salary cap remains in place to prevent price inflation

The above restrictions mean that house prices cannot rise massively again as they are capped to the borrowers’ salaries; people can’t overstretch as the macro-prudential rules don’t allow them to so do. We feel this is a practical solution that could be implemented quickly that would help to break one of the many logjams in the current system.

Reintroduce Bedsits & Build Higher

The constant push for higher standards of rental accommodation has actually served to undermine the very people these standards intend to protect. While insisting on all apartments being dual aspect, having an underground car parking space, banning bedsits, limiting the height of apartment buildings to protect skyscapes etc all sound like noble ideas, they have the impact of substantially increasing the cost of construction. The cost of building apartments to these higher specifications are so high that viability is only achieved in the most expensive areas of cities and only affordable by the highest earners. This removes the bottom rung of the ladder as Carol Tallon eloquently puts it. When someone is homeless, dual aspect and a car parking space are not relevant. They need a place to live. Many of these measures were introduced when rents were falling and we had no shortage of accommodation. The below RTE report from 2008 references rents continuing to fall & the market being flooded with property. In such an environment, increasing standards may have seemed logical. But things have changed. 10,000 homeless people would absolutely love a bed-sit instead of temporary accommodation.

The ongoing objections to co-living is another case in point. All the usual people are up in arms, for fear a developer would make a profit, calling for these to be banned. But co-living is a very effective means of housing large numbers of people in a high-density environment. Our only criteria should be that properties are safe; that’s it. Let the market deliver basic, safe apartments / bedsits & let these serve as the bottom rung. As people work and move on in life, they can aspire to the next rung. By continually insisting that everyone must have a Rolls Royce, ultimately it means that lots of people end up walking. In fairness to Eoghan Murphy, he has acknowledged this and has introduced measures to allow co-living, higher buildings, reduce car parking requirements where public transport is in place, eliminate need for dual aspect and so forth. This is stimulating more supply & is to be welcomed. Recent suggestions that all rental properties must achieve a certain BER standard would be a totally retrograde step as the costs of making these improvements will be borne ultimately by tenants. The idea that imposing higher standards & costs on landlords improves the situation of tenants is naive in the extreme – the costs will be passed on, rents will go up and yet more will be homeless. Again, a homeless person doesn’t give a damn about the BER score of an apartment – they want a roof over their head for starters.

Source: CSO Ireland

Developers have continued to favour urban sprawl developments in the suburbs over high rise apartments in cities when we need far more apartments given changing demographics.

Source: CSO Ireland

Planning permissions for apartments practically stopped from 2012-2015 despite changing demographic trends meaning we need to be ramping up apartment construction.

Our changing demographics requires much more apartments in cities than 3-bed semis in suburbs. Alas, increased standards & height restrictions for apartments has meant that we haven’t been building them. Measures of late in terms of facilitating higher build heights, no longer insisting on car parking space etc have helped viability and we are slowly seeing an increase in the number of apartments coming on stream albeit still far below where we need to be. Planning permissions for apartments have increased of late so hopefully the relaxation of unrealistically high standards will feed through to increased supply of apartments.

More Social Housing

The ideal scenario is that every citizen can aspire to owning their own property. While many espouse the benefits of life-long renting, the reality is that arriving at retirement age and still having to pay rent must be a daunting prospect. Ideally, by the time someone has retired, they have paid off their mortgage & can live out their retirement with the peace of mind that comes with owning the house you live in. Alas, this simply isn’t realistic for a certain section of society. Not everybody in society has the wherewithal to secure employment, save a deposit, get a mortgage & pay it off over a few decades. These people of course need to be housed. No amount of new developments will help these people as they will never be homeowners. They will look to the State to provide them with housing. As mentioned above, the output of social housing over the last decade simply hasn’t been enough to keep pace with the demand from those unable to house themselves. This has started to be addressed & if the government can hit its targets, this will play a key role in ending homelessness and reducing rents.

Allow Retail Change of Use Planning

With the large-scale migration of shopping online, we now have more retail space than we need. This trend seems to be only going in one direction with the retail of the future being characterised by online purchases delivered from large warehouses directly to people’s home or work. A walk down any city thoroughfare throughout Ireland will show large swathes of empty units that are now of a bygone, pre-Internet era. While many lament the amount of empty space above the shop, in many cases, the shop is now also empty. Allowing these units to be reconstituted as residential dwellings would bring our cities to life with an infusion of people living in them. Some retail would survive and benefit from this increase in city dwellers but a reduction in the quantum of retail space that we have in favour of residential would seem to make sense in the context of us having too large a retail footprint and not enough residential.

Conclusion

Our recovery from an insolvent nation in 2010 to the fastest growing economy in Europe and virtually full employment in 2019 has been incredible. This success has created growing pains as our infrastructure has creaked under the strain of a growing population and inward migration of 30,000 people per annum. However, the element of surprise is gone now. We are a growing population with a thriving economy and that will remain the case for the foreseeable future. Good work has been done. The vacant site levy, gradually but steadily increasing social and private housing supply, short-term letting restrictions, relaxation of apartment minimum size requirements, facilitating of taller buildings, rent pressure zones, increased eviction notice periods etc show us that the government does want to solve this issue and has taken measures that will, in time, improve things. This focus needs to be maintained until the problem is solved and the State can house its population. Unless progress continues, rents decrease & pricing becomes more affordable, this government will be punished at the next election and those offering an alternative approach will be elected with a mandate to do what this government couldn’t. It is all to play for.

Appendices

Appendix 1: Rent Arrears by Local Authority 2017

Large scale rent arrears to local authorities is a cause for concern. Despite being offered substantially discounted rents, some people still don’t even pay these, safe in the knowledge that local authorities will not evict them.