Rent inflation a clear signal of supply constraints

Ronan Lyons, Economist

2nd May 2013

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

Rent inflation a clear signal of supply constraints

Ireland's property market continues to fragment along urban and rural lines. The most recent Daft.ie House Price report outlined how asking prices in Dublin were up year-on-year for the first time since 2007, while outside Dublin, prices were over 10% lower than a year previously. Much the same trend is evident from the rental market, outlined in this report, with rents in Dublin 5% higher than a year ago but static elsewhere. The average monthly rent in Dublin is now €77 higher than it was in late 2010 - that's almost €1,000 extra a year.

The reason for these varying trends is supply. Looking at the rental market in Dublin, there are now fewer properties available to rent than at any point since early 2007, when rents were rising at double-digit rates. Whereas this time last year, a renter in the capital would have over 4,000 units to choose from - or indeed over 7,000 to choose from in 2009 - currently, there are fewer than 2,000 homes on the market in the capital.

At the same time, there is talk of a glut of housing in Ireland. The focus of what we talk about, when we talk of Ireland's property glut, is the "ghost estate". According to the Department of the Environment, Ireland's 3,000 or so ghost estates contain 180,000 units, thus it is hard to conceive of a shortage of accommodation. But it is important to look at what is being measured with those numbers. Of the 180,000 units, roughly half are occupied, while the bulk of the remainder are only at planning permission stage.

Indeed, of the 50,000 units in ghost estates in Dublin, less than 10% are complete and vacant (700 houses and 4,000 apartments), while the same number again are partially complete. Roughly speaking then, for all Ireland's ghost estate worries, when it comes to the capital, there are at most 5,000 homes lying vacant in ghost estates, with another 5,000 units potentially able to come on to the market within the next 18 months with some work. About 90% of these units are apartments, suggesting that when they do come to the market, it will be to the rental market, rather than the sales market.

How does this compare to demand? Would 5,000 extra units both this year and next flood the rental market? The graph overleaf shows the average number of units rented out by region, during 2012. In Dublin, typically about 4,300 units were rented out each month - but only 4,200 were listed, eating away at the stock of supply. The result is that now the supply on the market in Dublin is less than half that required to meet a month's demand. In other cities, supply and demand are roughly equal, while elsewhere in the country, particularly outside Leinster, there is still more supply than demand.

Estimates of rental supply and demand, by region

After over five years of a relatively one-dimensional analysis of oversupply, it is time for policymakers to add some nuance, both by region and by type. We know from the Census that there is something in the region of 300,000 empty dwellings in the country. But we also know from the Department of the Environment that at most 35,000 of those are in ghost estates.

Therefore, Ireland's oversupply problem is overwhelmingly a problem of one-offs and one-offs are disproportionately a rural phenomenon. Between 10% and 15% of all dwellings in rural Munster, Connacht and Ulster are empty one-offs. In contrast, the same category constitutes approximately 3% of residences in Dublin.

It is sometimes argued that whereas Dublin may not be blighted with over-supply, instead of building again, we can get people to sprawl into its commuter counties. There are unfortunately two limitations to that argument. Firstly, evidence from the housing market suggests that while people were happy to commute an extra hour a day in the boom and pay the same price - as they would benefit from rising house prices - the same logic does not apply today. An extra half hour each way is associated with a 10% discount on prices, everything else being equal.

And secondly, even then, it is not clear that there are that many units available in Dublin's commuter counties. Physical geography can be deceptive - the four traditional commuter counties may be large but they contain only half the dwellings of the capital. Including one-offs, Dublin has approximately 23,000 houses that are either vacant, partially built or not-yet-started but with planning permission. All four commuter counties have only a further 24,000.

Dublin is a city where about 10,000 new households are formed every year, according to statistics on first-time births. New properties coming on the market through aging and executor sales probably total less than 4,000 a year, while the current rate of completions in the capital is about 1,000. The maths simply doesn't stack up - to avoid potentially harmful spikes in prices and rents in the capital in the near future, new supply will be needed.

HIGHLIGHTS:

Annual change in asking prices, by region
Rental Price 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 Q1 2013

    Posted By: Dan @ Lettingsagent.ie Date: Thursday May 2, 2013 @08:17AM

    Banks are clearly closed for the buy-to-let market. There are some fantastic investment properties out there, but without access to loans, would be investors are told NO before even making a loan application so the bank stats don't reflect declined applications.

    Landlords are an extremely important part of our Economy. As much as people love to hate Landlords, they provide accommodation for a huge percentage of our population, yet the government and banks continue to dis incentivise this sector with increases in Taxes, Charges and this year a double taxation with the NPPR charge (second home tax) and the Property Tax due. Since the removal of bedsits from the market with the introduction of the Housing Standards Act, this has cost landlords a small fortune to upgrade property to meet requirements again adding to the cost of letting and pushing some landlords out of business as they simply can't afford to upgrade their property and don't have access to cash or loans.


    It seems to be a vicious cycle and the ones suffering most are the end users who are generally fairly cash strapped themselves - The Tenants!

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  • Re: The Daft Rental Report Q1 2013

    Posted By: John Date: Thursday May 2, 2013 @10:02AM

    This is deeply disquieting. Excessively high rents such as we are seeing represent a huge wealth transfer from the (mostly younger) generators of wealth to (mostly older) investors/speculators.. This is counter-productive as it removes the ability to invest, to own property and to spend in the local economy of the area.

    Most critically, though, what happens to these people when they retire? Even a handsome defined benefit pension would struggle to meet average Dublin rents. Are we destined to spend our retirement in bedsits?

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  • Re: The Daft Rental Report Q1 2013

    Posted By: James Buckley Date: Thursday May 2, 2013 @10:04AM

    Excellant report and analysis.

    This parallels well with the UK and the concentric nature of London , where rents year rise by circa 10% due to lack of supply due to the only growth in jobs in the service industry which is all city based. Cities all over the world are finding that IT , and service soft skills are driving rental growth and property prices.

    There will be no supply side improvement , developers ( are there any left in Ireland ) and bankers have no appetite for construction risks.

    Rents will increase for houses in Dublin by 10% this year and perhaps 15% in 2014 , not good for the economy or tenants as wages will need to increase or we all get poorer.

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  • Re: The Daft Rental Report Q1 2013

    Posted By: Bobby Dazzler Date: Tuesday May 14, 2013 @03:51PM

    Oh yeah James ? and 30% in 2015? 60% in 2016?

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  • Re: The Daft Rental Report Q1 2013...... Incorrect on rents in D18!!!!!!!!!!!!!!!!!!!

    Posted By: Jeanette Date: Thursday May 2, 2013 @10:04AM

    There has been a mistake on the Rents being achieved in the Dublin 18 region.

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  • Re: The Daft Rental Report Q1 2013

    Posted By: Matt Melia Date: Thursday May 2, 2013 @10:09AM

    Rents have definately gone up significantly and demand is still very high. In Cork it has been as much as one third depending on area in the city. There is a lot of people holding off buying because of the slow market and are renting instead. That includes many people who can afford a mortgage.
    In the case of buying, my advice is to buy now, even though few will listen to what I say. House prices may have fallen by say 5o% according to surveys but if someone is willing to sell now you can get up to 50% off the maximum price the house was ever at. This is significant. At some point in the future people will decide to buy again and probably all at the same time. This has happened before. Any price falls will be cancelled out and prices will start increasing. Also, even already there is a lot less new houses being built to the extent that less houses are being built than are required. This can only be good news again for greedy developers in the long run.
    By holding off, I think people are going to generate yet another spike in prices rather than putting house price growth on a sustainable path.

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  • Re: The Daft Rental Report Q1 2013

    Posted By: Joan Date: Thursday May 2, 2013 @10:38AM

    Would anyone agree that landlords are increasing their rents collectively because of the property tax which they shouldn’t be passing on to the tenant anyways? My landlord notified me that the rent is raising an extra €50 per month suspiciously around the same time he would have been notified of his property tax. The property tax is the property owner’s responsibility and according to threshold is not a cost that should be passed on to the tenant. Landlords are all raising their rents together at this time to adjust the market rates themselves and nothing can really be done about that. Currently in touch with PRTB and it seems to be a complaint they’re receiving a lot at this time

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  • Re: The Daft Rental Report Q1 2013

    Posted By: Anonymous Poster Date: Thursday May 2, 2013 @01:08PM

    No, rents are rising due to Government interference, increased charges, bank interest rates rising, and costs. No matter what if the cost to the retailer increases so do the goods.

    It will get to a stage where it will force first-time buyers to buy as the rents will not be affordable and buying will put money back in their pocket in the long run. Id say were not far away from this point.

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  • Re: The Daft Rental Report Q1 2013

    Posted By: Anonymous Poster Date: Friday May 3, 2013 @07:16AM

    I am a landlord and yes, I am passing the property tax increase on to my tenants and making no bones about it. This is after all, a charge for local services to the rental property (i.e. the tenant, not me) and is with few exceptions, applicable to every single property in the state.

    It's naive of tenants (and Threshold) to think that these charges, like other increases in base cost, won't make their way to tenants sooner or later...

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  • Re: The Daft Rental Report Q1 2013

    Posted By: Landlord dublin Date: Thursday May 2, 2013 @12:12PM

    Wow, another well put together Daft report and already the anti landlord comments are coming in! A couple of facts from a cruel heartless landlord who gets a kick out of riding up on his horse and threatening his tenants with eviction notices/ burning at the stake if they don't pay increased rent:

    Rents are down at least 40% from peak. Have rent allowances, income supplements, confirmation allowances, 'back to work' Fas scheme allowances, childrens allowances and any other form of social welfare dropped by that amount? Eh no.

    And your dead right, the figures are not accurate as they are based on asking prices. The real figures are much higher than that as there is so little supply on the market, at the moment. Its called supply and demand. Simple economics.

    Supply > demand = tenants negotiating hard for lower rental prices and rightly so.
    Demand > supply = rising prices and tenants whinging and moaning and forgetting about the cheap rent they have had for years and forgetting to put the surplus cash they were saving by not buying aside for the rainy day which inevitably happens.

    If you dont like the flat/ house your in, move. Theres loads of choice out there, maybe not in the EXACT location you require but you cant have it every way. If you dont like the job your in, either get a new one/ emigrate/ put up with it.

    Right, now thats off my chest, Im riding off on my trusty steed to pay the PRTB charges, Household tax, NPPR tax, septic tank tax.....

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  • Re: The Daft Rental Report Q1 2013

    Posted By: FJ Date: Thursday May 2, 2013 @03:50PM

    is a fact that Ireland is experiencing the largest population growth in Europe. The supply of new housing in the country over the last 18 months has fallen notably and is expected to decline further. As a result, the supply of new houses is inadequate to cater for both natural population increase.

    The resulting accommodation shortfall will give rise to higher rents and/or higher purchase prices, ŕs increasing numbers of people will have to queue for the small number of dwellings which builders will construct in the near future or which investors (if any) will put out to rent.

    If landlords hold onto their existing investment properties, the supply of houses for sale will be further limited, thus forcing purchase prices up. Equally, if owners decide to sell, the number of dwellings available for rent will be minimal, thus increasing monthly rates.

    The budget changes will have minimal impact overall as the measures introduced will not go far enough to prompt those convinced of continuing falling prices to buy. However, the clever househunters, who had already decided to purchase early in 2013, will take these changes as their cue to get a home and will beat the rest of the pack.

    Other people, awaiting further reductions in house prices will be disappointed as both monthly rents and purchase prices will increase

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  • Re: The Daft Rental Report Q1 2013

    Posted By: Realist Date: Thursday May 2, 2013 @04:47PM

    This was always going to happen, it was just a matter of time in Dublin, IT & Int'l FS driving up demand in all cities, we are about 3-4 years behind London on this now, I was just wondering when it would kick in. Reduced supply due to a disincentive to buy (lack of mortgage approval / high variable mortgage rates) leading to a requirement of 10% yields - think about it - you buy a place (assumiing your on higher rate of tax, so 55% of income will be gone through tax / PRSI, then you have property tax, NPPR etc) then you'd have to pay amortising mortgage out of the balance, so realistically sub 5%.

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  • Re: The Daft Rental Report Q1 2013

    Posted By: N.D. Date: Thursday May 2, 2013 @08:25PM

    As a LL I have notified tenants of a rental increase purely because of the Local Property Tax. Every LL I know is doing the same.

    The tax is a cost and, like all costs, is reflected in the price/tax.
    When the govnt adds taxes on to alcohol or petrol this is soon reflected in increased prices.
    Nobody -including Theshold -states that LLs must absorb the cost of this tax -it would insanity to do so.
    There is no extra profit for LLs in increasing the rent because of this tax, which ,after all, is supposed to be for the facilities in the area where the tenant lives ,not where the LL lives.

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  • Re: The Daft Rental Report Q1 2013

    Posted By: LL Date: Saturday May 4, 2013 @07:32PM

    I am going to pass on any extra taxes or costs to me that I can. This is how the market works. Im sure that tenants were happy when they could ask for reductions too.

    I have had tenants tell me that I can increase the rent above the average rent in the area. Well I can. If the average rent today is €800 and I want to increase to €850 then I will. I am entitled to break the cap and if I get that then that becomes the new max that people in the area can charge. If this was not the case then rents would never be able to increase.

    I have noticed a lot of people moving from the country to Dublin too. The rate seems to be increasing.

    There wont be any building going on for a long time. All the builders are broke. Nobody will get money from the banks to take the risk. And anybody with money wont risk it.

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  • Re: The Daft Rental Report Q1 2013

    Posted By: michael walsh Date: Saturday May 4, 2013 @10:25PM

    I think one of the problems facing buyers at this point in time is that they dont know what the real value of any property is. The 2007 values were overpriced and the 2013 values are underpriced in relation to what it costs to construct a dwelling. At any time in history buyers should be able to compare asking prices for finished homes or commercial properties with the actual cost of construction adding the site cost for whatever region ,street ,area. There is little doubt that the asking price for many.properties in lreland are way below what it would cost to construct even at reduced labour costs .Also material costs are moving on because of global demand and increased costs of transportation .lt would be informative if the Construction lndustry Federation would publish such information on this website therefore giving a comparative price/cost analsysis giving assurance to buyers that their investment is worthwhile. Is this klnd of straightfoward logic that buyers are looking for to give them the confidence to go ahead and purchasa. Unless climate change makes our summers any worse than they have been , given our mild winters. Iittle seismic action occasional flooding by and large lreland is a pretty safe place to live climatically speaking. Our peace process is working which is something l like to remind people especially if you are considering a property in the border area .This country will continue to grow and prosper with each new generation .The original wording of the American constitution was , freedom ,liberty and the right to own property.lt is the responsibility of those involved in property transactions that these rights are respected . Home ownership is a right not a ripoff.

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  • Re: The Daft Rental Report Q1 2013

    Posted By: Katherine Date: Tuesday May 7, 2013 @08:39PM

    Its quite simple. Where there are jobs, rental is easy. No jobs, rental is difficult. The same as in GB.

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  • Re: The Daft Rental Report Q1 2013

    Posted By: Anonymous Poster Date: Sunday May 12, 2013 @05:17AM

    I think you mean the UK!

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  • Re: The Daft Rental Report Q1 2013

    Posted By: Anonymous Poster Date: Friday May 17, 2013 @03:01PM

    property has been overlooked as an investment opportunity in ireland.however in a

    capital city like dublin their is a pent up demand for residential property to rent.

    major psychological shift in favour of renting than buying,with no new supply coming

    on stream.In an era of increased liquidity from central banks,irish residential property

    in good areas yeilding min 5 per cent,offers excellent value.Added to this the irish

    goverment are offering no capital gains on property bought on or before 31 dec 2013

    and held for 7 years.FILL YOUR BOOTS MY FRIENDS

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  • Re: The Daft Rental Report Q1 2013

    Posted By: James Buckley Date: Friday June 14, 2013 @09:19AM

    Its a dublin landslords market , banks too selective about giving mortgages , jobs only in dublin , rent , rent , rent .... for many thats the only option. Fine if your only looking for a 1 or 2 bed flat ...houses are a differant market .. very few available without a massive commute city locations now getting more and more pricey ... can't see this ending by 2016 rents will be up 30% .. for family homes.

    The property market is in the very very early stages on the next bubble ... we as a nation should be buidling houses where they are needed in dublin to suit demand in the future...

    same old story no planning ....then crises.

    regards


    PS . I am a reluctant landlord

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