Published on May 9th, 2017 | by Martin Clancy
The importance of measuring rents properly
The rental market has, for over five years now, shown increasing signs of distress, with stronger demand but weaker supply each year. Market rents in Dublin, for example, are now 66% higher than at their lowest point. Outside Dublin, rents have risen 41%. A key part of the political reaction has been the introduction of Rent Pressure Zones.
This measure sits on top of existing measures, which limit the frequency with which landlords can increase rents. To be designated a Rent Pressure Zone for three years, rents in an area must increase by 7% or more annually for the majority of the last 18 months. Once a Rent Pressure Zone, rents can only increase by 4% per year.
The principal aim of RPZ’s is to protect sitting tenants from significant rent increases. While the measure is based on rents registered with the Residential Tenancies Bureau, trends in the RTB and Daft.ie are highly correlated, albeit with a slight lag in the RTB figures. If Daft.ie figures were used to calculate Rent Pressure Zones, 47 of the 54 markets covered in the report would currently be RPZ’s.
What is common to both Daft.ie and RTB measures is that they use the rent at the start of the lease – in the case of Daft.ie, it’s the listed rent, while in the case of the RTB, it’s the rent on the formal lease lodged with the bureau.
In a market where most leases lasted just one year, this kind of measure captures trends in the full rented sector well. However, if people choose not to move as regularly, it is better to think of the rented sector as divided into two categories: “movers” and “stayers”. And one of the main reasons people choose not to move regularly is if rents are rising rapidly. Therefore, the RPZ measure could be mixing things up: using trends rents paid by movers (“market rents”) to control rents paid by stayers (“sitting rents”).
In preparing this Daft.ie Rental Report, we surveyed over 4,000 tenants, asking them details about the path of rents they have paid in recent years. What we were interested in was examining the extent to which landlords have passed on rent increases faced by movers to sitting tenants. In other words, have “sitting rents” followed the same trend as “market rents”?
Since 2013, market rents nationally have risen by just over 50%. However, sitting rents have increased by just 27%. In other words, those who have stayed in the same lease have enjoyed a discount relative to market rents, with rents increasing by just half the increase seen on the market.
The implications for the system of Rent Pressure Zones are obvious. In order to control sitting rents, sitting rents themselves must be measured. It is not helpful to rely on market rents in a rented sector where now the typical lease lasts over three years.
Indeed, the survey undertaken for this Daft.ie Rental Report suggests that for many – although by no means all – sitting tenants, there has been no dramatic increase in rents. This may mean that the Rent Pressure Zone system makes things worse, rather than better, by amplifying the insider-outside nature of the rented sector.
Sitting tenants now enjoy not only a discount relative to the market rent, but also protection of that lower rent into the future. Meanwhile, movers in the private rented sector face not only far higher rents but almost no availability in the market. In such a market, it would be a brave prospective tenant who would ask the landlord to see proof that the rent they would pay is only 4% higher than a year previously!
The message from the rental market to policymakers is the same as it has been for over five years now: more supply is needed. Until policymakers understand why it costs so much to build a two-bedroom apartment here, compared to anywhere else in Europe, that’s unlikely to happen.