We need to escape 10% rental inflation being the new normal

Ronan Lyons, Economist

10th May 2016

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

The figures in this latest Daft.ie rental report show an increase in the average rent nationwide of 9.3% in the year to March 2016. This represents a remarkably persistent rate of rental inflation, with the average annual increase rents since the second quarter of 2014 being 9.6%. Granted, there has been a shift in the composition of rental inflation, away from Dublin and towards the other cities in the rest of Leinster in particular.

Least and Most Expensive Areas

Nonetheless, there is the danger that this very high rate of inflation becomes something of a new normal. There is nothing normal – or indeed sustainable – about inflation in rents of 10%. This is particularly the case, given that the rate of inflation in the wider economy is close to 0%. In other words, if this situation persisted into the future, the average household would have to devote an ever greater share of its income, just to pay its rent.

The rule of thumb about a household's accommodation costs is that their accommodation costs, in the form of rents or mortgage payments, should not be greater than roughly one third of the household's disposable income. If we take a household whose gross income is €45,000, this leaves them with roughly €3,000 a month in their after–tax disposable income. This means a household earning €45,000 should not be spending more than €1,000 a month on its rent. It is worth noting that an income of €45,000 is in the upper half of the income distribution, in other words this household is on an above–average income.

Mortgage vs Rent in Dublin

However, if we look at the rental market, we can see a growing disconnect between household incomes and prevailing rents. West Dublin, for example, is typically viewed as one of the most affordable parts of the rental market in the capital. The average rent for a three–bedroom house in West Dublin, though, has increased from less than €900 in 2012 to more than €1,300 in early 2016. In other words, it is becoming increasingly difficult, even for those with above–average incomes, to house themselves in or near the capital.

We know that investors involved in renting out accommodation require a net yield, or annual financial return, of at least 5%. The maths of finance means that once we know this, we can scale up from the monthly rent to construction costs. A monthly rent of €1300 converts into upfront construction cost of €260,000. And this brings up a second and more worrying point about the supply of homes in Ireland.

Mortgage vs Rent in Republic of Ireland

Even if the developer required land for free, it is not possible to build either a two–bedroom apartment or a three bed semi–detached house in Ireland currently for €260,000. So even before Ireland's dysfunctional land market has its impact on affordability – and therefore on the volume of new construction – there is a fundamental problem in construction costs in Ireland being too high relative to our own incomes.

The formation, at last, of the new government hopefully marks the start of a new chapter in terms of housing policy in Ireland. It is widely acknowledged that, along with healthcare and possibly water charges, housing is the most pressing issue facing the new government. However, housing policy currently is dispersed across a number of departments and government organisations, including the Property Services Regulatory Authority, the Central Bank, the Housing Agency, the Department of Social Protection, the Department of Finance, the Department of the Environment, and local authorities, as well as others.

This means that no one government minister turns up at Cabinet meetings with housing consistently number one on their agenda, as happens routinely with health and education. Therefore, a new Housing Minister, or someone with similar responsibilities, could bring much–needed focus to housing policy in Ireland. And as the first item on their agenda needs to be a government sponsored audit of construction costs for the most common types of homes built in Ireland.

I would suggest this involves establishing in a transparent way the details of the costs involved in building a two–bedroom apartment, a three–bedroom semi–detached home, and four bed bungalow. This should be done not only for Ireland but also for other countries, including Northern Ireland, England, Denmark, and other economic peers. Comparisons should also be made to Ireland 10, 20 and 30 years ago, to see the impact on costs of changes in regulations and specifications.

By doing this, and by doing it in a transparent way that can be improved by industry experts or others if better evidence emerges, this will firstly create a consensus on what has been a contentious issue of the past two years, namely the level of construction costs. Perhaps more importantly, this will also identify the three, four or five policy measures that would have the greatest impact in bringing construction costs back in line with real incomes. Until this measure is taken, there will be no clarity in housing policy around supply and more importantly there will be an increasing mismatch between the new demand for homes of all forms, including rental, and their supply.

Average Rents Annual Percentage Increases

Discuss This Article

  • Re: The Daft Rental Report Q1 2016

    Posted By: Happy Landlord Date: Tuesday May 10, 2016 @09:39AM

    I welcome these increases. I will be adding to my portfolio soon.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Seán Date: Friday May 13, 2016 @04:54PM

    Best of luck but you obviously haven't done the sums!! Even though rents are rising and probably will for some time to come, the net rental yield v the cost of the investment does not make financial sense. Even if you have the cash and are not borrowing the capital sum, it still does not make sense. Its why there is a shortage in supply.

    Put your cash into BOI and PTSB shares and sit back (get your heart checked first though!).

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Happy Landlord Date: Tuesday May 17, 2016 @06:39PM

    I don't know about that. One of my tenants is paying 70% of his salary on rent so I think I must be doing quite well. Let's hope the recovery keeps going.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: ana Date: Tuesday May 10, 2016 @10:18AM

    I think that the average of cost of renting for new people looking for a house is a lot higher than it says. I have paid 2400 for a 3 room old apartment in Dublin 1. And all the other houses that I looked were similar to this one.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Anonymous Poster Date: Tuesday May 10, 2016 @10:21AM

    As a small developer in Dublin the cost to local and central government is33% average these are up front payments from borrowed money it\\\'s madness as my capital is at risk should something arise going forward no thanks give the properties to the Americans for half price

    • Reply to this message
  • Develop "Digs" Options for More Student Bed Spaces

    Posted By: David Burns Date: Tuesday May 10, 2016 @11:21AM

    The Leaving Cert is next month. 1000s of young people will be flying the coop following that state exam, looking for a bed space in Dublin for the new academic year.

    Most of them won't even get a viewing.

    The majority of students aren't on a fixed income and can only sign for a 9 month lease. Landlords have no incentive to let rooms to them in today's competitive, overcrowded private market. While property development is slowly heading in the direction of increased purpose built student accommodation, we need an interim solution for these young people.

    Digs are one area of the market that offers that interim solution. Digs are a student specific sector of the market with a potential for rapid growth if existing tax incentives are pushed with the right kind of targeted promotion.

    A concerted effort should be made by our new Minister for Housing to promote Ireland's rent-a-room scheme with homeowners living in areas adjacent to universities.

    Homeowners can earn up to €12,000 of tax free income by participating in Ireland's rent-a-room scheme and they put more rooms up in a student specific area of the housing market in that process.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Pat Date: Wednesday May 25, 2016 @05:40PM

    Rent a room needs to exclude utilities from the €12k cap! One penny over by a shower happy tenant or heating on all hours and you're out of the scheme. There's a shouting crisis looming for students and Rent a Room needs immediate improvement.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Tony Date: Tuesday May 10, 2016 @02:49PM

    The new Minister for Housing should seriously consider persuading the Government to allow all rental costs to be claimed for against income tax in the short term. HAP tenants should be given a voucher up front for the first 12 months rental, which a landlord could exchange for tax free income. This would streamline things somewhat for the better. I hope Simon Coveney is reading this.....!

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Karl Date: Tuesday May 10, 2016 @04:34PM

    Figures are actually higher than is being reported. Just look, average prices yourselves on the "Rent Agreed" prices which are available. 15-20% lower in some cases. Average rent in galway for 2 bed is 918 average. Nowhere near the 700 they are stating.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Bela Date: Tuesday May 10, 2016 @10:30PM

    That is very interesting,

    There are German companies who can build a lightweight zero-energy house around 100sqm for 50000-60000 euro. Also those houses have higher standard as an Irish one.

    May I ask what cost 260000 euro to build in an Irish house?

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Do unto_others Date: Thursday May 12, 2016 @09:04AM

    The Irish government has proven itself incapable of understanding basic economics and encouraging property rental as a mutually beneficial business relationship, not a Charles Boycott era class war.

    Policies intended to reduce rents instead limit supply which leads to higher rents. Rent-allowances intended to help struggling tenants, empower landlords by providing an upward bias on prices. Eager to catch the top of the next government-created bubble, owners turf out tenants and hoard vacancies for months or years. A decade of taxpayer-supported subsidies towards builders which has left us with short supply of poorly constructed homes.

    We need:

    - An vacant property tax of 20% would discourage the hoarding which has dominated the Irish property market. Houses should be used as homes, not gambling chips for vulture funds. Those who speculate on property without providing value should pay for the public resources they consume.

    - Bias any EU-mandated corporate tax increases to encourage companies to locate outside of the overheated Dublin market.

    - Telecommute tax incentives would reduce pressure on our transportation infrastructure caused by the sprawl, caused by the housing bubble.

    - An empty bedroom tax would encourage those with more house than they need to downsize or let rooms to help adjust the severe misallocation of resources where some families are squeezed into 1Br B&Bs while some single people struggle to maintain huge properties.

    - For social housing, the government should open up for bids from builders in Germany, Poland, Canada, Norway... to rehabilitate NAMA properties and go into direct competition with Irish builders to force them to be efficient. The Irish building industry is exactly where the US automotive industry was the 1970s before Japanese companies and NUMMI revealed how inefficient, expensive and poor quality they had become when insulated from real-world competition.

    Owners and landlords need to work together to pressure the government for sensible laws with the understanding that what is bad for tenants will eventually be bad for landlords and vice-versa. Begin with "Do unto others as you would have others do unto you."

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Maggie Date: Wednesday May 11, 2016 @12:37AM

    Prices are a way higher. 3 bed house 1200 - 1300 in Galway
    2 bed 900 euros I agree with Karl

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Anonymous Poster Date: Wednesday May 11, 2016 @01:25PM

    Rent for students averages around €1,900 - €2,500 for a 4/5 bedroom house, I should know currently paying this for student daughter, don't know where the figure of €900 is coming from??

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Anonymous Poster Date: Wednesday May 11, 2016 @08:37AM

    No mention about one to two bedroom homes. Single people also exist in this crazy market.
    RAS in Galway City requires so much paper work and have so many rules, it turns Landlords off renting to people desperate to find a roof over there head. Prices are way out of reach for people on disability. All talk and no action, resulting in people living in fear of homelessness. The real poor in this country are brushed aside, forgotten about. Governments have alot to answer for. They retire, lose an election with their pockets lined.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Anonymous Poster Date: Thursday May 12, 2016 @12:46PM

    Few suggestions:
    Daft.ie and other renting websites should add a "Previous Tenants' Comments" section in the room/house ads. In this way people can post comments about how the house conditions, housemates or the landlord are. I think it would change the attitude of most landlords or tenants living in the house. At the moment, who is renting the room or the house feel like they own the world and they can put whatever price they want, even the house is not in a good condition and they are not as good landlords/housemates as they should be.

    Also, probably %90 of the houses are not registered as rental. Landlords are making a lot of money from renting and not paying tax at all. This should be regulated strictly and landlords should pay a fine (not making the tenants pay for this either). All the rentals should be registered and the rent of the house should not go up because the landlords now have to pay tax for their income.

    Also most of the deposits are taken by the landlords based on lies or silly reason. I know cases that the landlords keep the deposit saying that they need to advertise the room/house again. There is no way the tenants should be paying for the house to be re-advertise because they are leaving. If there was a section in Daft to put this sort of comments, if would help the next tenants to be more cautious.

    There should be fixed prices based on the region you live in and based on the condition of the house. For example, they should use the Census form information to define the rent prices in certain areas. Then a committee should examine the houses/apartments to decide if the conditions meet the rent prices. In most cases the house conditions do not justify the price of the rent. A standard price of say 800 euro for 2 bedroom house in Citywest can be set. There can be +/- 200 euro derivation if the house/apartment is in a poor condition or has very high standards like a gyn, jacuzzi or as such.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Anonymous Poster Date: Thursday May 12, 2016 @04:29PM

    The housing shortage problem will not be solved criminalizing those who dare to rent their homes/investments.

    I'd be curious to know how many of the unoccupied properties in Dublin are owned by individuals or families who have reallocated to a different home and just keep their former home as a saving vehicle.

    To be fair, it seems rather a hassle to rent anything these days, particularly with the bad rep of doing so (particularly if you dont need the money).

    The only ways to increase renting standards is by having rental alternatives.

    What about instead of punishing homeowners we make it easier and simpler for them to rent instead of taxing them?

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Do unto others Date: Thursday May 12, 2016 @09:07PM

    "Daft.ie and other renting websites should add a "Previous Tenants' Comments" section in the room/house ads. In this way people can post comments about how the house conditions, housemates or the landlord are. I think it would change the attitude of most landlords or tenants living in the house."

    Awesome idea. How about it daft, you could make a difference in less than 24 hours! If you don't do it, I may just have to come up with my own landlord ratings service.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Sean Date: Friday May 13, 2016 @11:00AM

    Totally agree, and I'm a landlord! But there should also be one for landlords rating tenants as well. It cuts both ways. I have 7 properties rented out; the shortest tenancy I have had is 3 years; one house has the same tenants in it for the last 8 years, it is their long term home, not just a stop gap before eventually moving on. The secret is a relationship that works both ways and unfortunately (from costly personal experience) not all Irish renters get this point of view!

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Nadi Date: Thursday May 12, 2016 @10:21PM

    I totally agree with you. This situation is giving landlord a feeling of power that make them act like they are free to do as they wish. There are no regulations, to protect a tenant and writing comments on past rentals would give back a bit of power to tenants. Daft, this is a brilliant way to help us tenants, without having to wait on a government that couldn t vare less. We can hope all we want for change, in the meantime, what will we do in july 2016. And september when student look for accomodation? Act now and you will help the housing market more than you think. And don t make these comments an option...make them mandatory, and become the yelp or the glassdoor of the rental industry, a sector that could really do with reviews of the sort.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: John Date: Thursday May 26, 2016 @05:06AM

    We rent to city centre tenants in Dublin. We give a good service. The tenants have my phone number and I am always available.
    We buy run-down properties and immediately renovate them. My standards are dictated to me by giving the quality of accommodation and service I would wish for my daughter to get if she were moving into the apartment.
    Repairs are expensive. Banks are charging higher rates here than elsewhere. Tax is half the net profit. But the risk is everything we own.
    I choose the tenants. Our tenants are happy with what we do and recommend us to others. I enjoy providing a high-quality useful service.
    I have found the most problematic tenants are social welfare tenants. They wear out the property more quickly than working people.
    They bring more social problems with them and are difficult about paying the rent.
    The social welfare department is equally responsible as they hide tenants' responsibility behind 'data protection'.
    Threshold and PRTB join in to leave SW tenants a nightmare waiting to happen. And it usually does.
    The average cost per person per night in our accommodation is between €9 and €12 per person.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: me Date: Friday May 13, 2016 @01:00PM

    your suggestion about comment sections is very good!

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Anonymous Poster Date: Thursday May 12, 2016 @01:40PM

    The rent prices are getting ridiculous. I myself have finished college and moved to Dublin for work. Earning 30k a year, I'm spending 50% of my wages on renting an old mouldy studio apartment in a rough area. I'm constantly checking for new places to move to, but it seems the rent prices are only increasing.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Annonymous Date: Thursday May 12, 2016 @10:52PM

    Unfortunately this report misses out any indication of expected movements and trends that may help people to decide on whether prospective first time buyer decide whether they should continue to rent or seek to buy. Looking at the comparisons between mortgages and rent payments in Dublin, it seems that buyers will pay a high monthly premium and one imagines they can then expect to go into negative equity quickly. There seems to be no financial incentive for buying. The government needs to address this at the same time as addressing issues with the rental market.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Bela Date: Friday May 13, 2016 @07:35PM

    For the previous comment: Thursday May 12, 2016 @10:52PM

    You have absolutely right. There is now any indication in this report.Ronan composed this letter very carefully. The strong market is just illusion.

    One view point: no one was able to sell their houses during the recession.
    But if you see this from the other view point: no one was able to buy a house during the recession.

    So as there was downturn in sales that generate and extremely high demand.
    What we saw in 2014 is just the wave of this demand. 2014 was only the after effect of 2009.

    I have following the markets for a while and made a few own statistic about the recent years. I check on daily basis how many houses are available between 25k to 175k and at least 3 bedrooms in Dublin (I think that is a very important indicator, as most people try to buy these houses). It shows over 26% increase since last December.

    Do you want hear about a layman's opinion? My opinion the supply is increasing nowadays.


    I

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Anonymous Poster Date: Friday May 13, 2016 @10:55PM

    I don't know where you're getting these numbers from, unless you've somehow confused two bedroom with three bedroom or something.

    I'm currently renting a two bedroom terraced house in Dundrum and am currently having to look for a new property because the landlord can't find accommodation at a reasonable price for their daughter attending UCD. The government should be making UCD construct additional housing facilities aimed at affordability for students on their land. So much rental accommodation is taken up in the area by UCD students, and the supply nowhere meets the demand.

    Meanwhile UCD has huge areas of land sitting idle and does nothing to assist students struggling with accommodation. It's a joke.

    I'd also love to know where you're finding three bedroom properties for under 2000 in southern Dublin, because I'm struggling to find a two bedroom property for that much, and even then demand is sky high.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Anonymous Poster Date: Saturday May 14, 2016 @11:01AM

    My rent was put up by 21%, 3 weeks before Christmas and I live in rural cork. no hope of renting any closer to city, it's unaffordable.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Somebody Date: Monday May 16, 2016 @07:27AM

    The problem in Ireland is all these flat buildings. We need more high rises. That's how you decrease the average construction cost. Adjust the tax signals and the permission granting process to promote high rises and in 5 years time the issue will be resolved.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Happy Landlord Date: Tuesday May 17, 2016 @06:43PM

    We need more people that's the problem. Ireland used to have a much larger population that it does today. We need more EU immigrants and others to come to Ireland to create more demand that's the problem. With rent allowance increasing, providers of service like myself can increase our profits and thus buy more property. This can only be a good thing for the house building industry?

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Happy Landlord No.2 Date: Friday May 20, 2016 @04:28PM

    happy Landlord i agree we need more people because the service i provide is limited. I want to have several properties rented out and keep increasing the amount of properties I can lease out to create a brilliant service.
    Hopefully we will return to the prices of 2007 so that most cannot afford to buy, builders will build and I can rent out more and more properties earning myself a passive income.

    I feel it is going this way so the future looks very bright in the housing market

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Pat Date: Wednesday May 25, 2016 @05:47PM

    Rent a Room should not include unities. One penny over €12k with Rent a Room and you're gone! A shower happy tenant or all hours on heating and you're gone. Utilities need to be taken out of the income cap.

    • Reply to this message
  • Re: The Daft Rental Report Q1 2016

    Posted By: Happy Landlord Date: Friday May 27, 2016 @08:48AM

    Pat, Get tenants that don't wash much so. Works out cheaper.

    • Reply to this message

Respond to Article

Your Name: (Optional)

Subject:

Message:

We ask you to keep your comments on-topic and suitable for a general audience. The article you are commenting on is entitled: The Daft Rental Report Q1 2016

Please Note: Your message will not be displayed on the website until its contents have been checked by a member of staff.