Seamus Coffey: Housing rents that rise 25% every five years are not sustainable

Not only do we need to provide for the growing population and the changing nature of household composition, we also need to replace the units which are leaving the private rental sector, says Seamus Coffey

The current failures of the housing system are most acute in the private rental sector. At a time of population growth, the decline in the stock of properties in the private rental sector is creating knock-on problems.

The squeeze is forcing households into unsuitable accommodation, requiring young adults to live with their parents for longer and resulting in significant numbers of people needing emergency accommodation. 

That efforts to try to alleviate these poor outcomes are met with significant resistance and is confounding.

Ireland’s housing system has traditionally comprised three sectors: Owner-occupiers, local authority tenants and private tenants. 

The relative size of these sectors and the transitions between them have changed over time.

Access to the first two named sectors is rationed via mortgage credit and housing lists. The residual was picked up by the private rental sector where the standard determinants of supply and demand play a more prevalent role.

It is accepted that significant problems arose when mortgage restrictions were relaxed, and in many cases ignored, in the early 2000s. 

Finding the balance is not easy, and through a set of mortgage measures, the Central Bank is trying to ensure that mortgage credit is available while avoiding the destabilising effects of excesses. 

There will be households who think they could borrow a little more, but this will always be the case regardless of where the cut-off is set.

Mortgage drawdown figures from the Banking and Payments Federation Ireland show that in the last five years there have been almost 100,000 first-time buyer mortgages. 

These borrowers have borrowed €22bn giving an average loan size of €220,000.

This doesn’t indicate whether 100,000 first-time buyer mortgages in five years is the 'right' amount but 100,000 is a significant number. 

Logically, it follows from the volume of transactions that there has been a supply of properties for them to buy.

One notable feature of the flow of first-time buyer mortgages is that just over two-thirds of them were for existing properties. 

For purchasers, supply can come from existing units as well as new builds. 

Looking at the online property listings shows that there are currently around 6,000 for-sale listings of properties with two bedrooms or more and BER, or building energy ratings of D2 or better.

Owner-occupiers only need to buy once; tenants need to rent every month. The forthcoming census will throw much-needed light on the debate about the housing system. 

Figures from the Residential Tenancies Board (RTB) show tenants being issued with large numbers of termination notices and point to a flight of properties from the sector.

At the end of 2016, 320,000 tenancies were registered with the RTB. By the end of 2019 this had reduced to 303,000, even though this was a period over which net inward migration was almost 90,000.

We don’t have a dataset that matches dwellings to the sector of our housing system they are used in, but it seems likely that a large share of properties sold by landlords have been bought by owner-occupiers.

Rising rents mean many young adults live with their parents for longer.

Private tenants have limited protection from eviction. This contrasts hugely with the implicit protection provided to owner-occupiers where years of non-payment of mortgages are tolerated.

There are explicit supports not available to tenants. 

Borrowers who can’t pay their mortgage may be transferred to the mortgage-to-rent scheme where local authorities pay the rent to new owners of the property and former owners pay a differential rent contribution in line with social housing rents to the local authority.

Tenants will get short shrift if they don’t pay the rent and if they are unable to pay, they will not get a golden ticket to jump the queue for social housing while maintaining the right to buy the property at a discount in the future.

In the last two years, around 4,500 notices of termination have been submitted to the RTB. Of those, only 15% were for breach of tenant obligations. 

Over half were because the landlord intended to sell the property. 

There will be many more tenants who left properties where no formal notice was issued or because rent increases meant it became unaffordable.

Ireland needs more of all forms of housing. However, the only part of our housing system where the stock of properties is falling is the private rental sector.  If this was at a time of falling demand it might not be a pressing issue.

In the aftermath of the 2008 crash, the private rent component of the Consumer Price Index fell by around 25%. From 2009 to 2012, Ireland experienced cumulative net outward migration of 80,000 and with reduced demand it is not a surprise that rents fell during this period.

As noted above in the three years before the pandemic, Ireland had net inward migration of 90,000. 

Ireland remains an attractive location to move to or back to but with few vacant rental properties it is not a surprise that rents have risen during this period. 

Since the start of 2017, private rents in the consumer price index have increased by 25% and this came after even faster increases in the five years before that.

Going back to 1996, it is perhaps surprising that overall increases in rents and employee compensation are similar, though there have been periods when they deviated significantly from each other.

Lack of availability

The most pressing issue in the private rental sector at the moment is availability. 

Online listings show only 1,000 properties available nationally for monthly rents of less than €2,500, with particularly high rents for one-bed units.

Opposition to build-to-rent properties has been expressed on the basis that the rents are too expensive. 

This is true but these rents also apply to existing rental properties many of which are of lower standards than newly built units.

Ireland’s housing system needs to provide routes for people to become owner-occupiers.

In the last five years, the household sector has been a net purchaser of 37,000 housing units and some intra-household sector transactions will have seen former rental units becoming owner-occupied. More are needed.

Ireland’s housing system needs to provide housing for those whose incomes are insufficient to purchase or rent privately. 

At the end of 2016, the number of dwellings directly owned by local authorities was 131,000. By the end of 2020, this had increased to 141,000, while for approved housing bodies the figures are 24,000 and 33,500. 

This gives a total of 175,000 directly-owned social housing units. More are needed.

The housing system needs to provide housing for those who wish to rent and in dwellings suitable to their desired household composition. 

At present, the private rental sector does not adequately provide for one- or two-person households.

Not only do we need to provide for the growing population and the changing nature of household composition, we also need to replace the units which are leaving the private rental sector. 

With the predominant small landlord more likely to sell and leave the sector rather than add to their property portfolio the most likely avenue for the required rental units to come from is via new builds.

Ireland’s housing system has a large private rental sector. 

Building housing to provide for the needs in this sector is not unsustainable development. Rents that rise 25% every five years are.

• Seamus Coffey is a UCC economist and a former chair of the Irish Fiscal Advisory Council