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Double-digit rent inflation a warning sign for policymakers

Ronan Lyons, Economist

9th Feb 2014

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

Double-digit rent inflation a warning sign for policymakers

The latest Daft.ie Rental Report shows that rents in Dublin in late 2013 were rising at 11% a year, the fastest rate of inflation in rents since mid-2007. Coupled with a 5% increase in rents in 2012 - and a marginal increase in 2011 - this now means that rents in Dublin are almost 18% higher than they were when they reached their lowest point in mid-2011.

While Dublin rents remain just over 15% below the peak seen in mid-2007, they are effectively at the same level as early 2006, when the average rent in the capital was €1,250. In contrast, rents in Munster, Connacht and Ulster are about 20% lower now than in early 2006 and did not increase during 2013. The rental market in Ireland's four other cities and Leinster is between those two extremes, with rents rising by 4-5% during 2013 but still 10-15% lower than in early 2006.

The latest figures confirm a trend that dates back three years, when falls in rents stopped abruptly in Dublin but largely continued elsewhere. To understand these trends, one need look no further than the laws of supply and demand. The graph below shows the number of properties available to rent on the first of each month, from the start of 2006 to February 2014.

The sharp fall in rents across the country in 2008 and 2009 was associated with a significant increase in the number of properties available to rent. Since then, though, there has been a sharp fall in stock sitting on the market, particularly in Dublin. A prospective tenant looking for a place to live in Dublin in February 2009 would have had almost 6,700 units to choose from. Five years on, there are fewer than 1,500 to choose from, less than half a month's typical supply.

Meanwhile, demand is clearly city-led. The young make up the bulk of renters and where they choose to live is driven by one factor above all others: the availability of jobs. As is the case with all other developed countries, Ireland's rural areas simply cannot create jobs as well as Ireland's cities so, for those who choose to stay in Ireland as they enter the labour force, it is the cities where they look for a place to call home.

The clear signals the market is sending out about a surplus of demand over supply in Dublin in particular raise questions about Ireland's construction sector. The 36 months from January 2011 to December 2013 saw barely 2,000 new dwellings started in Dublin, whereas best estimates suggest that the capital currently needs that number of new homes every four months. Until construction restarts in Dublin in a meaningful way, it is quite likely that we will see rents continue to rise in many parts of the city, while the next generation of tenants is pushed further out from the city and their jobs.

For much of the last half-century, with renting in decline, trends in the rental sector were something of a niche interest. However, the fraction renting in Ireland has doubled in less than a decade. With nearly one in three households now renting, the rental market can no longer be treated as a topic of only secondary importance. Ireland's competitiveness depends on cheap accommodation - both for sale and to rent - so double-digit inflation in rents concerns everyone.

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