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Approaching normality at last? Ireland's doughnut property market

Lorcan Roche Kelly, Economist

7th Feb 2011

Lorcan Roche Kelly, an independent economic researcher, commenting on the latest Daft research on the Irish property market.

The latest Daft.ie figures show little change in rents over the course of 2010, with the average rent nationwide falling 0.6% to €830. After falls of 15% in 2009 and 10% in 2008, these figures will come as no small relief to landlords. With house prices continuing to fall, albeit at a slower levels than in previous years, yields on property, in Dublin city at least, are starting to approach investable levels for the first time in a decade.

As with all statistics, we need to drill into the figures a bit to get a better idea of the story on the ground. The first thing that jumps out is that the market in Dublin seems to be a little ahead of the market elsewhere, with rents in the capital showing minimal moves during 2010. In the rest of the country, the rental pressure is all to the downside, but not to an extent that should prove worrying at the moment. The smaller prices moves in Dublin are probably due to the size of that market, and the rate at which it can clear, compared to the rest of the country.

So, it would seem that after six turbulent years (rapidly rising rents cause as many, if different, problems to rapidly falling rents) the Irish rental market may be returning to an even keel. Like everyone else, renters want to have clarity on what their future expenses will be and don't want to feel like they are over-paying for what they have. Reduced volatility in rents will provide reassurance in both cases.

It is important, therefore, to look at what pressures may add to uncertainty in the rental market for the coming year, and to judge whether those pressures will cause much movement in rent prices.

First, we have to look at the recent ESRI report which predicts that some 100,000 people will leave this country in the next two years. It is safe to assume that the majority of people leaving will be younger Irish people without firm ties to the country, or recent emigrants - people who normally rent accommodation. Landlords will not find easy replacements for these tenants, and competition for scarcer tenants will naturally lead to reduced rents. This reduction in the number of tenants will probably affect commuter belt areas hardest as people still looking to rent will migrate closer to city centres - a trend that can already be seen from the data where rents actually rose by 0.3% in Dublin city during 2010, but fell by 3.5% outside of major urban areas.

This 'reverse doughnut' effect in the rental market will be something to keep an eye on in the coming two years - all presuming, of course, that the ESRI forecast is reasonably accurate.

On the yield side, there may be pressures coming too. It is looking increasingly likely that the ECB will start to raise interest rates from their current lows sooner rather than later. With December's eurozone inflation figure coming in above target and Jean-Claude Trichet making all the right noises before an interest rate hike, it seems unlikely that we will make the summer without at least one rise in ECB rates. Interest rates matter to investors because they set the cost of money. If ECB interest rates rise then the rental yield demanded by investors from property will also rise. While this rental yield is more likely to be increased by further pressure on house prices rather than upward pressure on rents, it may lead to slower reductions in rents than would be caused if the ESRI emigration numbers happened in isolation.

The stock of units available for rent has fallen from the peak, by up to 50% in cities (more reverse doughnut, perhaps) and while this may be caused by normalisation of rents expected by landlords, there is also a chance that it might be an indicator of something more fundamental happening in the Irish rental market.

Economists have long tried to explain the exceptionally high level of property ownership in Ireland through an historical lens without, for the most part, offering a situation where this cycle might be broken. There is a chance - and this would need decades rather than years worth of data to prove - that the average Irish person may have fallen out of love with home ownership.

The last two decades have seen much greater labour mobility, both nationally and trans-nationally, as the 1950s ideal of a 'job for life' has disappeared. This fundamental change in how we live our lives has to be reflected in the decisions we make in our lives. Moving to a new job in a new area and buying a house was a natural decision to make in Ireland as house prices never fell - and (nominally, at least) they hadn't in three decades - so the perception of a capital loss didn't exist.

Many have learned the very hard way that capital losses can mount up very quickly and purchasing a house is a decision many have come to regret. There is a chance that people may stop seeing renting as 'dead money' and start to see it for what it is - payment for accommodation, to be treated like payment for any utility, free of worries about such things as ECB interest rates and market confidence.

There are still many factors, positive and negative, that will feed into the Irish rental market. But it is the profile of the renters themselves that will be most interesting to watch. Will we maintain the Irish obsession with home ownership, or will we start to see a more European attitude emerge?

The housing market is the business cycle. There can be no recovery in the property market without an improvement in the economic outlook for Ireland. Until the business cycle turns up again, any argument that favours ownership over renting can only be based on the traditional Irish arguments in favour of property ownership rather than the harsh economic realities we are now facing.


Rental Index
Rental Price Index

Stock and flow of properties
Stock and Flow of Rental Properties


Snapshot of Asking Rental Prices Nationwide
Snapshot of Rents Nationwide