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Top end of the market hit the hardest as rents continue to fall

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Ronan Lyons, Economist

17th August 2009

Ronan Lyons, Daft's in-house economist, commenting on the latest Daft research on the Irish property market.

This latest Daft Report shows that rents are falling at double-digit rates around the country. This fact will no doubt be good news not only for new and returning students, but for all tenants around the country. As students start their hunt for accommodation this week, the typical student renting a double-room in Dublin city centre can expect to save about €1,000 over the course of the coming academic year, compared to last year. This is about the same amount that two students renting a two-bedroom property in Galway or Limerick might expect to save.

Urban areas hit hardest

Rents have now been falling month on month for almost a year and a half. In early 2008, the average rent in Dublin was over €1,300. By July 2009, that had fallen to just over €1,000. Cork has seen a similar 20% fall, with the average rent in the city now below €850. Around the country as a whole, rents are typically between 15% and 20% below their peak

The regional spread of falls is interesting, though. It is urban areas, Ireland's larger rental markets, that are seeing the biggest falls in rents, in both euro and percentage terms. In South County Dublin, rents are on average 23% below their peak, whereas in Connacht, the fall has been 14%. In certain parts of the country, for example Kerry and Donegal, the fall has been closer to 10%.

The supply-side puzzle

The primary reason rents are falling is due to increased supply. Basic economics tells us if there is competition among tenants, rents will rise and if there is competition among landlords, rents will fall. The total number of properties available to rent at any one time on daft.ie has risen steadily over the last two years, suggesting much more competition among landlords. On August 1st 2007, there were 6,200 properties available to rent nationwide. On August 1st 2009, there were 23,400 properties to rent, almost four times as many.

On the face of it, then, the explanation is easy. The increase in supply has far exceeded any increase in demand from would-be first-time buyers staying in rented accommodation while house prices fall. But while the overall point is certainly true, the fner details suggest a more complicated story. Why is it that South County Dublin, where there has been a 160% increase in properties to rent, has seen a fall in rents almost twice as large as Munster and Connacht, where there has been a fve-fold increase in properties available to rent?

Confidence versus afordability

The answer may lie in the diference between short-run and long-run pressures on the property market, when it is in a bust. To see why, one can look at the sales market. As last month's House Price Report showed, the average asking price in South County Dublin, which peaked at €680,000, has fallen over 30%. By comparison, asking prices in South-East Leinster have fallen just 18%. It is easy to think why prices at the top end of the market have fallen more than prices in cheaper areas: while the boom fuelled house prices everywhere, the very top end of the market saw the biggest excesses.

In economic terms, the lower the house price bracket, the more prices are driven by afordability, i.e. determined by fundamental criteria such as average wages and interest rates. The higher the price bracket, the more prices are driven by confidence, i.e. determined by 'future expected value', what the buyer thinks the property will be worth when it is sold again.

Confidence swings much faster than afordability, so as boom has turned to bust over the last two years, those houses whose prices are determined by confidence to a greater degree have taken the bigger hits. We can see the same pattern emerging in the rental market. The Daft Report analyses 16 regional markets around the country. On average, the higher a regional market's peak rent, the larger its percentage fall has been so far.

The short term versus the medium term

What remains to be seen, though, is what the dynamic in the market will be beyond the short term. The end of falling rents may be near. On August 1, for the first time in over two years, apart from the usual end-of-year market clearing in December, there were fewer properties available to rent than a month previously. If that blip become a trend that continues for the next year, and if Ireland's output and unemployment pictures look to have turned a corner by early 2010, rents may stabilise, particularly in Ireland's more expensive markets, where sentiment is paramount.

The great unknown in all of this is the extent and future impact of overconstruction during the boom years. In an economy that needs perhaps 40,000 new properties a year, an average of 80,000 were built in recent years. This means that there is potentially a factor for downward pressure in house prices and rents even when sentiment has turned the corner. It is worth noting that more new homes were built in Connacht and Ulster between 2002 and 2008 than were built in Dublin in the same period, even though Dublin has twice the population. This suggests that the impact of overconstruction on rents and house prices is likely to be diferent in diferent parts of the country.

But for the moment, the news is all good, at least for students and their fellow tenants.


HIGHLIGHTS:

Rental Index
Rental Index

Stock and flow of properties
Stock and Flow of Rental Properties


SNAPSHOT:

Snapshot of Rents Nationwide
Snapshot of Rents Nationwide

Discuss This Article

  • Re: The Daft Rental Report Q2 2009

    Posted By: Ste - StatusIreland.com Date: Tuesday August 18, 2009 @11:45AM

    I recently moved from a 1 bed apartment in Dublin 2 to a 2 bed apartment in Dublin 1. I am now paying an extra €50 a month for the extra bedroom, a newer apartment, bigger space and nicer surroundings. If I had moved last year the same apartment would have cost me an extra €450.

    The details presented in this report are very much a great reality for everyone renting these days.

    • Reply to this message

  • Re: The Daft Rental Report Q2 2009

    Posted By: Apache Date: Tuesday August 18, 2009 @10:40PM

    The Rental Report is quite accurate in presenting the numbers but by omitting few key elements is failing in drawing the big picture in future perspective. Firstly there is indeed a certain percentage of new properties coming from the unsold pool but there is (in my humble opinion) a higher percentage coming from those once occupied by migrant workers which fueled the meteoric rising in the first place. Secondly, the continuing deterioration of the global economy coupled with an incoming pandemic can create a vast amount of empty properties which in turn will deflate rent prices further, therefore venturing in giving a future perspective becomes hazardous for economists and laymen alike.
    The current economic model is entirely based on population growth and works something like this: the government gets funding from the international financiers and starts funding infrastructure and programs of attracting businesses which in turn create jobs, jobs need to be filled by people. Once the people are in employment they become consumers, home buyers, tenants and later investors, landlords and business owners. All these people begin to create more growth through consumption, housing and infrastructure construction and new businesses creation. The final result in this process is the taxpayer which pays back to the government the initial funding plus interest. This is obviously a very compressed view of the economic model but enough to understand that the only way to expand this circle is population growth and the only lubricator responsible for a smooth spin is the funding, eliminate one of these elements and breakages will occur, eliminate both elements and you have a complete breakdown.
    Before talking about stability in the rental market the above mentioned system functioning should be restored or perhaps the entire economic model should be revised.

    • Reply to this message

  • Re: The Daft Rental Report Q2 2009

    Posted By: Kate Date: Thursday August 20, 2009 @08:18PM

    firstly it is easy to see in one way why there are more rental properties now than in 2007 and that is because more people advertise on daft now than in 2007 so in my opinion this report is seriously flawed.

    secondly I would seriously question the average rents attributed to Galway. You only have to look to see what is up at present to rent in galway to see that what you present as the average price is way off the reality. Again your figures appear to be very flawed

    • Reply to this message

  • Re: The Daft Rental Report Q2 2009

    Posted By: Tom Date: Friday August 21, 2009 @05:22PM

    Well, I don't know definitively about Galway, but in Dublin and most parts of the country, Daft has had pretty much a monopoly on all rental listings since 2004/2005.

    Why didn't the number available to rent increase then so?

    • Reply to this message

  • Re: The Daft Rental Report Q2 2009

    Posted By: Ed Date: Saturday August 22, 2009 @06:13PM

    Remember Daft is not responsible of the level of prices shown on the adverts.
    Landlords or renting agents put the price they want to put, that's all.
    This report is actually based on advertised prices, not real renting prices.
    It's not possible to know the real price renters pay, except if you launch a survey to current renters.
    On daft, a landlord can for example ask for 1500€ for a 2bed in Dublin (whatever the district is), and eventually will rent the flat at 1000 or 1200 after negociations... but Daft will never be informed of the final agreement... :-)
    Even with this level of decrease, we are still in a celtic tiger level of prices... no changes actually...
    I think if you want to rent an apartment, arrange a visit, and then propose 20% less than the price asked in the current advert... you will certainly win the deal... there are hundred (thousand maybe?) of empty properties in Ireland... landlords need cash! :-)

    • Reply to this message

  • Re: The Daft Rental Report Q2 2009

    Posted By: Bob Date: Saturday August 29, 2009 @04:26PM

    I agree, I let 3 bed houses in the commuter belt at €950-€1,000 monthly, which is greater than the rate set out above.

    While I acknowledge possible sub-regional variations, I do not think that such rental differences can account for the low rate presented above.

    • Reply to this message

  • Re: The Daft Rental Report Q2 2009

    Posted By: Philip Date: Monday September 28, 2009 @03:49PM

    Bob, 3-bed in the commuter belt are in general not rented for the prices you are asking. Just keep those prices and you'll see your tenants leave next time you have to renew the lease.

    • Reply to this message

  • Re: The Daft Rental Report Q2 2009

    Posted By: James McKee Date: Sunday September 6, 2009 @04:05PM

    The reasonable price for a 2 bed apartment in Dublin should be in the region of 450-550 per month, with good space and storage room not the pokey dog boxes the Irish are used to and without the dirty brown carpet and mismatched old furniture that has been de rigeur in this country for decades.

    Have a country with security of tenure for tenants at the above price and you have the foundation for social stability, garage start-ups, 1 and 2 person entrepreneurialism, absence of family tension and room for the arts to breathe.

    Instead we are presented continuously, in this report as everywhere else, that 2 bed apartments for 1200 a month are 'good news all round'. How can you people call yourselves adults or even in possession of reason, common sense or humanity when you peddle such serf-minded nonsense? Is it our place to be born into this world to serve as economic items for a class of unproductive parasites? What a very foolish attitude is exhibited at every turn by the 'leading' Irish in all spehers of our society. Unbelievably limited, abusive and self-defeating.

    The spurious reasoning used by so-called 'economists' is also patently ridiculous - if prices fall greatest at the top-end its about 'confidence', if they had fallen greatest at the bottom it would have been about 'speculation', 'less immigrants' and 'contraction in credit'. Superficial sophistry from top to bottom.

    • Reply to this message

  • Re: The Daft Rental Report Q2 2009

    Posted By: Anonymous Poster Date: Friday October 9, 2009 @01:04PM

    Hi,

    I am actually having some trouble with my landlady.

    I would like to have some of your opinions.
    I am paying 330euros for a single room in a 3bedrooms appartment in the Cork city center. So the rent is 1000e
    The situation is a bit weird because there is actually no official contract.

    I just want to know what can justify an increase of the rent of 70euros each in this period when the general trend is a falling of the rent.

    I know that it is not the right place to ask but I am actually confused about this situation.

    Thank you.

    Regards.

    • Reply to this message

  • Re: The Daft Rental Report Q2 2009

    Posted By: John O'Shea Date: Tuesday October 13, 2009 @12:39PM

    Ask for a rent reduction of €70 and if not granted move out. Be prepared to back up your threat with action. No one is increasing rents in this market.

    • Reply to this message

  • Re: Daft Rental Yield Data

    Posted By: Rory Gillen Date: Thursday March 25, 2010 @03:25PM

    Hi Roana,

    The average Daft residential rental yield appears to be circa 3.5% according to your latest quarterly report. In comparison, I am led to believe that the CSO rental data supports a yield closer to 4.3%.

    Is there any structural reason for the difference ?

    Thanks for taking the query, and by the way if you wanted me to provide input to one of your quarterly bulletin's I'd be more than happy to oblige.

    Rory Gillen
    Founder
    http://www.investRcentre.com
    0878307100

    • Reply to this message

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