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The Spar Generation

David McWilliams, Economic Commentator

13th Sep 2005

David McWilliams is our guest blogger, analysing the Quarter 2 2005 figures.

Walk into any Spar today and you will see them. They are buying breakfast rolls, working behind the hot food counter or just picking up twenty 'blue' after work. They are Ireland's renting population - the Spar Generation. Whether they are young foreign employees or local twenty-something customers grabbing something on the way home, they have one thing in common - they rent. Given that hot food sales at convenience shops has increased by over 36% in the past year, if you want to see the future of the Irish rental market, go no further than your local Spar.

In the three months to July, the Spar generation have helped the Irish rental market to stabilise following two years of declines. This is bad news if you are about to rent a place but good news if you have just bought a gaff. Well actually 'goodish' rather than unambiguously good. Because, while the falls in rents of 2003 and 2004 have plateaued, house and apartment prices continue to rise faster than rental income, which implies that residential yields continue to fall. Luckily, the interest rate cushion is still soft and feathery and there is little or no sign of Euro interest rates rising for the foreseeable future. But given that the market has only just stabilised and increased future supply will only be taken up if all the underlying factors remain supportive, any change to the rate environment could tip this finely balanced market over.

So what is the investor/landlord to make of this quarter's big picture? If you are buying today to generate an income from renting residential property, you have missed the boat. However, as the banks are lending hand over fist to the market, you can still make a few quid by avoiding being Paddy Last. That's the rule. As Paddies continue to buy property as if it is going out of fashion, everyone's exit strategy in this inflated market is to make sure there is another Paddy investor behind you to whom you can flog. So make sure you are not that guy - make sure you are not Paddy Last. Always keep the exit doors open.

If you are not thinking of selling, but are concerned about managing your income flow, then data on time to let and average vacancies is crucial. Anyone, from the largest player with a substantial portfolio to the amateur investor with one buy to let property, can deal with lower but stable monthly rent. In contrast, prolonged vacancies can throw even the best-laid financial plans off course.

On average in Dublin it is taking 16.4 days to rent your place. Properties in Dublin 6 are moving quickest - typically just under two weeks on the market. On the other hand, if you have a place in the commuter belt, you are looking at three weeks to shift it. Similarly, properties in the centre city are on average remaining vacant for 8.6 days, while out in the commuter areas, places are empty for the guts of a fortnight. The average vacancy period for the city as a whole is 9.6 days. So taken together with the average time to let, an investor should probably at best be calculating income on an eleven months calendar. On timing, the data show clear trends and the best time to look for tenants is August when both time to let and vacancies fall sharply, so maybe with a bit of planning you could smooth your annual cashflow. What about our renters - the Spar Generation? The message is don't panic. Rents have firmed but only slightly and there seems little likelihood of rents moving upwards rapidly. In Dublin the average rent is €1164, while Cork rents have been largely unchanged. In Galway, bar the normal cyclical increase in rents in early summer, rents are lower than they were a year and a half ago.

In terms of the type of property, it is getting more expensive to rent four bedroomed houses in Dublin and this may reflect a number of factors. First there is increasing evidence of a change in our immigration patterns with more families, particularly from central Europe arriving. Secondly, while the supply of apartments has increased apace, there have been relatively fewer bigger houses built over the past two years. Where houses have been built many have been second homes which are vacant during the year and not on the market. 3 and 4 beds apart, decent supply is the main factor keeping rents down. So the message to the Spar Generation in Dublin is don't panic, the market's dynamics are on your side, there are plenty of properties out their, so shop around.

In Cork, the picture is broadly similar but the market is tighter with both time to let and vacancy rates falling. Rents in Galway have recovered steadily in recent months but are still off their 2003 highs. While in Limerick, rents, particularly in three and four beds, are still soft. These broad trends are mirrored all over the county. Back in Dublin an interesting dichotomy has emerged at opposite ends of the Dart line. Rents in Howth have seen a 13.4% rise, while the bottom has fallen out of similarly fashionable Dalkey with rents falling in the seaside town by over 4% in the second quarter over the first. Now is a cheap time to move to Dublin's swankiest suburb!

Specific market and financial concerns aside, the most important factor driving rents over the next year will be the immigrants in the Spar Generation. They are the people that will generate extra demand, and it is the extra demand rather than the expected demand that will determine the direction of rents in the future. Immigration is driven by push and pull factors. The push factors driving young people out of central Europe in particular will continue as their economies fail to generate sufficient opportunities. Where the economies are growing such as Poland and the Baltics, they are not creating sufficient jobs so a significant proportion of the young labour will emigrate. In terms of the pull factors, Dublin was this year ranked in an international survey as the easiest place in Europe to get a job. So with the economy set to grow by 5%, job opportunities will be plentiful. The only clouds are oil prices at over $60 dollars a barrel which may slow things down but not substantially as interest rates will stay low. This is not to say that there is great value in the housing market, clearly there is not; but cheap money and profligate bank lending should preserve the 'good times' for a while longer.

Finally, I am writing this overview from an internet café in Dublin. If you want to see the future for the rental market and particularly the foreign component that will drive it, spend a few hours in an internet café. Here you will see the rental market, with their pre-paid mobiles, hotmail addresses and MSN chat rooms. Next time you are worried about the direction of the market, drop in to a place like this and then go around the corner to Spar. If both are packed and busy, forget most of the hi-faluting economic commentary, feel the energy, drive and rental capacity of the immigrants and make your own calculations.