Construction, not rent control, the solution to the housing crisis

Ronan Lyons, Economist

12th May 2014

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

Construction, not rent control, the solution to the housing crisis

Most analysis of the housing market - both sales and rental - is currently done through the lens of the last housing bubble and where it was when it burst in 2007. However, that is a point of view that is increasingly out of date. In the rental market, for example, rents bottomed out in Dublin and Cork cities in late 2010 and had actually bottomed out a year earlier in Galway city. Ireland's urban centres are four years into a new housing market cycle - and yet there is still very little evidence that anything is being done about what is now a chronic shortage of accommodation in Irish cities.

With local and European elections just a couple of weeks away, a number of candidates - particularly in the Dublin constituency - have been talking about rent control as a necessary remedy for the ills of rising rents. However, while the desire to simply make illegal what you don't like is understandable, it mistakes the symptom for the underlying disease.

On the one hand, tenants already have reasonable security of tenure. Since the Residential Tenancies Act 2004, once a 6-month probationary period has been passed, tenants have security of tenure in four-year cycles, something that is known as a "Part 4 Tenancy". (To ensure this is the case, tenants who have signed one-year leases need to notify their landlord about their intention to stay - more here.) There are a certain number of conditions under which a landlord can terminate a tenancy, but getting higher-paying tenants is not one of these.

On the other hand, rising rents are caused by a lack of accommodation in urban centres and reducing rents will discourage the provision of new accommodation, thereby making the problem worse. What we have seen in both sales and rental markets is reasonably robust demand for accommodation in Dublin and other cities, which has pushed up both rents and prices. These should be acting as a signal to bring about new supply - so why has significant new building not started in Ireland's cities?

Whether construction of new homes takes place depends on whether revenues exceed costs. Revenues come from rents and house prices, which both appear to be at the cusp of affordability given incomes in Ireland. Therefore, if rents and prices are high enough, the solution is about reducing costs in construction - not about capping rents and thus further discouraging the very construction that would alleviate the accommodation crisis.

The cost base in construction includes capital, labour, land and regulation, as well as materials, whose prices are typically set on world markets. What is needed now is for the Government to go through each element in the cost base and develop actions to lower costs. It may surprise some readers to learn that the cost of building a house is 3.3% higher now than in 2007.

Labour costs in construction fell once, in March 2011, when hourly rates were reduced by 7.5%. But in an economy where the average disposable income fell by 25% between 2006 and 2012, and where there are significant numbers of long-term unemployed construction workers, is that enough? More importantly, the minimum hourly rate for a basic operative in Ireland at €13.77 remains a quarter higher than in West Germany (€11.05, a figure which will rise to €11.30 by 2017). Department of Environment figures indicate that for every €1 of materials, €2 is paid in wages, so the wage rate in construction has a real effect on levels of construction.

Just as important is the cost and supply of land. If people are allowed to hoard land or sit on derelict or vacant sites, this imposes a cost on the rest of society. Dublin City Council's proposed levy on derelict and vacant sites may help encourage unused land to be used, but it can do nothing to encourage land to be used better and its biggest effect may be just a clamour to have some activity - any activity - on these sites to avoid tax.

Related to this, various levels of government currently deploy a bewildering array of planning and building regulations and charges, each of which increases the cost of building. While standards of quality should not be sacrificed for political expediency, many of the regulations - such as minimum sizes - appear have to very little connection to quality and instead look like the preferences of planners and policymakers trumping those of households.

How the system currently treats land and planning regulations needs, at the very least, to be streamlined. Overhauling a dated and complicated system of stamp duties, development levies, commercial and industrial rates and amenity contributions, not to mention the Local Property Tax, with a single unified Site Value Tax is clearly the best solution to join up the very disjointed Government system that underpins Ireland's construction sector.

The Government's new strategy for the construction sector will be published shortly. No doubt the headline measures will relate to capital, with a fund for construction projects or targets for the pillar banks featuring prominently. But capital is only one part of the puzzle. Labour, land and regulation are just as important. It is to be hoped that the new strategy will contain specific measures to lower the cost of both labour and land, as well as streamline the Byzantine system of planning and building regulations. Only a holistic approach will be good enough if Ireland's latest housing crisis is to be stopped.

HIGHLIGHTS:

Rental Price Index
Rental Price Index

Stock and flow of properties
Stock and Flow of Rental Properties


SNAPSHOT:

Snapshot of Rental Prices Nationwide
Snapshot of Rental Prices Nationwide

Discuss This Article

  • Re: The Daft Rental Report Q1 2014

    Posted By: Seán Date: Tuesday May 13, 2014 @09:52AM

    I feel I am the only one who is missing the point in this housing crises.
    At the end of 2012, it was reported by UCD and DIT that there were 345,000 houses lying empty. If you strip out holiday homes and homes no longer in use, this leaves a surplus 170,000 houses and apartments.
    Also at the end of 2012, Deutche Bank came out with a similar report claiming that it will take 43 years to fill all empty houses and that 200,000 houses may need to be bulldozed.
    I can understand rent increases in Dublin but if there is such massive oversupply in the rest of the country, how come rents are increasing countrywide? Rents are driven by nothing else only supply and demand, but what has happened in the 17 months that these reports were produced?

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  • Re: The Daft Rental Report Q1 2014

    Posted By: George Date: Thursday May 15, 2014 @09:21AM

    Sean,

    Nama hold alot of housing (im not sure of the numbers) but they are not being fed onto the market, housing arrears are not being delt with which would also aid demand, there are probably other avenues which are being stalled all with the intention of creating false price rises. Yet again Government manipulation is key to everything which is wrong with the housing market in this country. Its a basket case, if you have the option to emigrate then do, it is easier to get ahead in other places as if they have their way future generations will spend their time servicing massive mortgages with no quality of life. Not the furure i want.

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  • Re: The Daft Rental Report Q1 2014

    Posted By: Daniel Date: Thursday May 15, 2014 @09:35AM

    Thats a very good point and it would be interesting to hear what Ronan thinks about it.

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  • Re: The Daft Rental Report Q1 2014

    Posted By: Maher Date: Sunday June 1, 2014 @01:03PM

    I agree with the previous posts and have been stating this for years. I have a prime example of a closeby house previously owned by a now bankrupt friend. This house has not yet entered the market, in three years !!!
    There is an abundance of free estates, apartment blocks unfinished, and stock in banks hands that has not yet been entered into the market.

    I am no economist, but have learnt a lot in the last 7 years, it is in the banks interests, as well as estate agents, etc that the price is hiked once more, it is not in the interest of a fair market.

    I beleive Ronan Lyons has missed this point in his text, unfortunately he did not date nor reference the data he presents.

    It may follow and would be appreciated.

    Maher

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  • Re: The Daft Rental Report Q1 2014

    Posted By: Carlos Eduardo R. Santos Date: Friday June 27, 2014 @01:45PM

    My opinion about this issue is that the gov dont need to control prices if it starts to create its own houses for renting...

    If the gov come into the market with low prices it would force speculators to decline their prices or go away....

    It's clear to me that there is speculation going on! The escuse of the speculator is always related with lack of supply...

    But what they dont tell you is that the same gov that is trying to control prices, is the one that estimulate the market bay giving benefits for those that earn less ..

    It is already a intervention isnt it ?

    Moreover, free market is beautiful in the paper.. I beleave Frederick Heick was 100 % right, except that if you dont control your market, somebody will...
    There is no competition among speculators in the realstate maket.

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  • Re: The Daft Rental Report Q1 2014

    Posted By: Dave Date: Friday June 27, 2014 @06:39PM

    I agree with all of the above. Since the 2011 census found all that vacant property there has been net emigration of 35,000 in two of the three years and an estimated 25,000 to april 2014 of the demographic that would be buying or renting houses.

    There are plenty of unoccupied properties in Cork City where I live, I walk past them every day and the vast majority are neither for sale nor rent. Rent Controls will do nothing to bring these on to the market. The availability of affordable rental properties is constrained by something else: owners' inability to rent these properties out or sell them to other would-be landlords

    Amongst the many logjams are.

    Tracker mortgage holders with property that they want to trade down or up, but can't for fear of losing their trackers.
    Tracker mortgage holders with property that they want to rent out but can't; for fear of losing their trackers. They also lose their tax relief.

    Non-Tracker properties in negative equity (but not arrears) that cannot be sold without clearing the balance.

    Other properties whose joint ownership is in dispute due to prolonged litigation or marriage breakup.

    No insurance - no mortgage: There are 20,000 or so properties in Dublin Meath and Kildare affected by pyrites. Bad construction, subsidence and recent floods make many other properties un-insurable in Cork especially.

    Many properties are not in a condition to be rented out and neither the owner nor any potential buyer could make back the non-tax-deductable cost of renovating or converting them as buy-to-lets. For tax purposes it isn't a buy to let until it is let. Try recouping the renovation cost whilst paying maybe 50%+ marginal tax (PAYE + USC, and in some cases PRSI ) on rental income (except the tax deductable 75% of interest). The owner pays the Local Property Tax on the increased value of the property.

    A speculator can sit on a derelict site and avail of full tax relief on any Capital Gains in 7 years time despite not renovating or renting it out.

    Some of the owners will be in institutional care or will have emigrated or don't need the hassle of PRTB registration, BER Certification, extra tax liabilities, managing the tenants for a relatively small return if any.

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  • Re: The Daft Rental Report Q1 2014

    Posted By: jake Date: Monday June 30, 2014 @09:42AM

    Tax on rental income has risen from 41% in 2007 to 62.5% ion 2014 according to
    Robert Jeffery in the Examiner 25/5/12
    On 29/6/14 the Sunday Business Post reports a 50k euro fine on landlords not declaring income on rentals by Revenue Commissioners.This has raised 75m
    euros over the past 2 years.

    The stock of available property to rent has crached from 25000 to 5000
    and rents are rising.

    QED

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