OECD urges Ireland to rethink rent caps and landlord tax breaks

The OECD said the current system can discourage developers, 'making the supply of housing less responsive to changes in demand'.

A new OECD report has suggested an alternative to the rent pressure zone (RPZ) system which would allow landlords to hike rents as they see fit when a tenant leaves a property.

However, some security should still be offered to renters during the lifetime of the new tenancy, the organisation said.

The Government should allow rents to be “freely adjusted” when tenancies end so that costs to maintain the property can be kept in line with inflation, it said.

That would potentially keep landlords in the market, it added.

The report comes following comments by Taoiseach Micheál Martin to the Irish Examiner which indicated that the Government is considering abolishing the current RPZ system and replacing it with something else. 

Rents in RPZs cannot be increased by more than 2% a year.

The OECD said the current system seems to have had “some rent stabilisation effects” but given the higher-than-normal inflation in recent years, “the cap is likely below the cost of maintenance and upkeep of property and might have driven landlords to sell”.

“Ireland should allow rents to be re-set between tenancies and adjusted for inflation during a residency, but care should be taken that it does not lead to unfair termination of contracts,” the report said.

It also suggested that stringent rent controls reduce the rate of return on real estate investment and can discourage developers “making the supply of housing less responsive to changes in demand”.

In addition to the rent reforms, the OECD also suggested that the Government should remove tax incentives for landlords and tenants.

Landlords are entitled to an additional temporary rental income tax relief of 20% to support private landlords provided the landlord does not leave the rental market during the four years.

“Such tax reliefs tend to favour higher-income households, who are more likely to own rental properties, and can be distortionary. 

"Hence, the new incentives should be phased out and should not become a permanent policy tool,” the OECD said.

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Renters can claim up to €1,000 back on their rent but the OECD said this measure is “not targeted” and “rental support for households should be provided through welfare measures based on income criteria and needs assessment”.

It added that other tax schemes, such as the temporary mortgage interest relief scheme, should not be extended further as mortgage interest reliefs for owner-occupied housing “tend to be regressive” and potentially lead to higher house prices.

On the residential zoned land tax, the OECD said the Government should consider increasing the tax beyond the 3% it is currently set at as well as an increase to the local property tax.