Rent Caps: Should They Stay or Should They Go?
Housing and ‘accommodation’ has quickly and clearly become the major issue of this era. We eagerly await the new Government’s updates on housing policy and its attempt to solve or at least improve the crisis. It’s no easy fix and James Browne has certainly been given a hard task, inheriting a long-standing mess.
It has been signalled that updates to the rental cap regime will be made as soon as Monday (26 May). Rent levels everywhere and particularly in Ireland are an emotional issue, understandably, so we think it’s important to highlight both sides of the argument for and against rent caps and to highlight the impact they have had and continue to have on the market.
The Irish housing market’s problems fundamentally all come back to housing supply and lack thereof as well as the fortunate position of extraordinary economic growth, increased employment and increased population. Everyone will naturally sympathise with the cause of the renter and not want to see rents increase at their expense however it must be made clear that rational investment capital both national and international will not return to invest in the Irish housing market at scale without a more attractive rent cap regime and broader residential property investment environment. While rent caps may only directly apply to rental properties, the market is impacted by the overall amount of properties supplied and constructed. The startling sight of large amounts of people queuing overnight in Lucan to secure a new build property caught a lot of headlines. While we build more homes to satisfy the deficit of owner-occupier homes, the rental market provides a great alternative and needs to be bigger. Another startling headline recently was that younger workers stuck living at home or in undesirable accommodation have given up trying to buy their own homes and have instead decided to apply for social housing – surely we can provide more hope to our younger generations.
How do the rental caps impact me as a renter?
It’s great if you can secure a nice suitable property and a good rent benefiting from the rent caps, but please also think of the broader impacts on the market, and if you weren’t so lucky to secure a suitable property. High-quality landlords who can’t increase rent by reasonable or market amounts are less likely to reinvest in the upkeep of the property. Many landlords in recent years have seen the rapidly increasing sale values of the property in the open market and have decided to sell, reducing the rental stock, particularly the high-quality rental stock meaning less available high quality properties to rent and higher market rents. The lack of investment in institutional PRS or ‘Private Rented Sector’ has meant a lack of overall supply of properties in Ireland and particularly dedicated rental which means it’s hard to find somewhere to rent, while also contributing to house price growth. For a functioning market, we need options across all tenures, social, affordable, cost rental, rent to own, owner occupier etc. – they are all interdependent. Those who cannot buy need lots of affordable alternatives and therefore a healthy rental market is essential. An abundance of rental properties at affordable levels means less pressure on the owner-occupier market and values. Of course in Ireland we do have a natural inclination/obsession with owning but long-term renting does provide a much larger component of the market in other geographies for example Germany, Austria and Switzerland (>50% households rent).
So perhaps there’s a way to protect existing tenancies while allowing landlords to partially reset to market in between tenancies and also allowing the construction of new homes to achieve the returns needed to pay for the building of the homes this country needs. State capital simply cannot afford to build what is required so we have to attract private market investment while protecting renters. Ironically, efforts to protect renters have actually damaged the broader renter universe more than they have protected the lucky few to have good quality and value rental accommodation. See the elevated numbers of our younger generation living at home with their parents.
Some potential solutions
A key restriction on housing supply is the cost of building the accommodation the country needs, namely apartments (build up high!) and modestly sized two, three and four bed houses. Currently the cost of building and delivering these homes when factoring in challenging expensive and lengthy planning processes, construction costs, and the fact that we charge 13.5% VAT on new build homes despite desperately needing them, leaves very little margin for the builder or developer and in many cases means projects don’t get started or completed, particularly for the smaller scale builders and developers. We will publish some case studies with examples laying out these challenges in due course.
The lack of residential building supply since the last crisis (we’ve built too many offices, relatively!) combined with economic growth has led to huge wealth creation for those who own the scarce supply and existing stock. Shifting some of the current VAT take on new builds which are currently rather unprofitable to build onto the existing housing stock in the form of a more meaningful annual property tax would help curtail house price increases versus incomes, and help fund new supply as well as social and quasi-social housing. A point recently made by Michael Stanley of Cairn Homes is that we have more than enough bedrooms in the country to house everyone – a lot of them are just empty. There’s no call for action on this point however it does highlight that for various reasons we have an under utilised and illiquid housing stock. A more meaningful annual property tax would improve utilisation. Some other measures to improve utilisation could be the increased construction of appropriate downsizer accommodation in communities where our older generations want to live, incentives to downsize, and state supports to help bridge the moving between homes when downsizing in retirement. The extent of vacancy and dereliction across the country is unacceptable and the state should step in to bring these properties into use for affordable tenure and penalise those who have let properties go unused and into disrepair. The traditional retort of, ‘it’s my property I’ll do what I want with it’ doesn’t stack up in a housing crisis and when listed buildings and national heritage have been allowed go to ruin.
The only meaningful way to ease the housing crisis across all tenures is to increase supply and build our way out of the problem. We’ve covered previously our views on tax breaks and accelerated planning measures to carefully speed up high quality delivery where it’s needed. There is increasing support from various experts and stakeholders for similar action which is great to see.
Any discussion on housing must note that the extraordinary returns on offer on a tax-free basis for emergency accommodation have dis-incentivised investment in conventional accommodation in recent years. It must be commented that this has had a profound impact on the market and appears to be profligate spending of state funds that could be better or more efficiently spent on accommodation of all tenures. We won’t dwell on this matter as it seems to be getting increased focus in both the press and Dáil.
What next?
A change to the rent caps will be the new Government’s first significant move on the housing crisis, the defining issue facing the country (global affairs aside). The Government will likely be defined and judged on its success on housing so I am hopeful that a broader package of housing policies soon follows to get the nation planning and building in a clever and careful but rapid manner.
Any questions or comments please comment or contact hello@ownhomely.com
Stay tuned for more updates and initiatives as we continue to expand our reach and services, all with the goal of helping more people across the country achieve their dreams of owning their own homes.
