Irish Rental Report Q2 2021 | Daft.ie

Daft Reports

10th Aug 2021

The same old story returns to Ireland's rental market

For the last 18 months, the Covid-19 pandemic has ‐ understandably ‐ dominated in all aspects of Irish life, including policymaker attention. As the roll-out of vaccinations reaches the thresholds required to some semblance of normality to resume, the examination of various aspects of our daily lives will begin, to see which bits are largely unchanged and which have changed forever.

For some, the prognosis is clear. There is little doubt that, barring public health emergencies, primary education post-Covid (or at least post the arrival of Covid) will be delivered in a manner very similar to pre-Covid times ‐ face-to-face. For other activities, the impact of Covid will take time to be understood. This includes higher education, where day-to-day life is likely to look quite different in 2025 than in 2015, and retail, where Covid-19 has awakened people to the possibilities of doing things online but is unlikely to destroy the appeal of experiential shopping.

In general, what will be needed to understand how Covid-19 has permanently reshaped our society is not so much time as data. This includes the key question of the extent to which office-based occupations will go back to the office, once the public health emergency fades. A closely related question is what the impact of Covid-19 will be, long-term, on Ireland's housing system.

Three months ago, in the commentary to the first-quarter rental report, I highlighted a number of underlying trends that suggested the temporary dislocation of Covid-19 was subsiding and, in its place, the old problem of a lack of rental supply was re-emerging ‐ and this time not just in and close to the main cities but around the country.

Those signals strengthened markedly in the second quarter of the year, as the figures in this report show. Nationwide, rental inflation picked up from 1.7% in the first quarter to 5.6% in the second. This is the highest rate of rental inflation since mid-2019 ‐ it is easy to forget that, pre-Covid-19, the rental sector had been inching towards stability, albeit at very high rents, with inflation easing from 13.5% in late 2016 to just 4% three years later.

As has been the case throughout the past year or so, that national average hides important regional differences. While Dublin rents are increasing again, year-on-year, they are just 0.5% higher on average than the second quarter of 2020. Elsewhere in the country, rents are increasing and typically at double-digit rates. In Munster, outside the three main cities, rents are 14% higher than a year ago, while in Connacht-Ulster, they are 15% higher.

The best predictor of rental trends is availability: just as Econ101 would suggest, how many homes are on the market now tells us a lot about the relative market power of tenants and landlords. And for tenants ‐ including students as they look to return to face-to-face higher education. There were just 2,455 homes available to rent on August 1st this year. This is the lowest on record, an extraordinarily low figure for a country of Ireland's size.

To put this number into any sort of context, it is possible to track the number of homes available to rent nationwide all the way back to January 2006, more or less the birth of comprehensive online listings nationwide. On average in those 15 years, there have typically been 9,300 homes available to rent nationwide. Even during the 2015-2019 period, when supply was very tight, there were an average of almost 3,900 homes available to rent.

Again, Dublin is less affected than elsewhere: the 1,666 homes to rent on August 1st in the capital is actually above the figure seen on the same date two years earlier and roughly in line with the 2015-2019 average. Outside Dublin, there were just 789 homes to rent in total ‐ in Waterford, an entire county with its own city, there were just 15!

The hope for renters and for Irish society is that August will mark the low-point ‐ as has been the case in other years and reflecting the timing of leases for the academic year. But the underlying pressure on Ireland's rental system is intense and the supply shortages are chronic and worsening.

It is very likely that Ireland's population passed the five million mark at some point late last year. If Covid-19 hadn't happened, we would have seen that confirmed in the 2021 Census ‐ but that has now been pushed back a year. Regardless, it means that in the fifteen years since the 2006 Census, Ireland has added over 800,000 people to its population. For context, it took Ireland 25 years to add the previous 800,000 people (1981-2016) and for an earlier instance of Ireland adding 800,000 people, you would have to go back to the pre-Famine period.

But with all that population growth, next-to-no new rental homes have been added. Ireland's rental sector is something like 50% larger now than fifteen years ago but the availability of homes to rent online is half of what it was then.

Clearly, this is a problem that cannot be solved by simplistic rent controls, which will at best hide the problem and are more likely to bring new forms of 'equilibration' ‐ including under-the-counter payments and discrimination of various forms.

To solve this, instead of wishing the problem away, new rental homes must be built. For this to happen, costs must be brought down. A two-bedroom apartment in Waterford will rent for something like €1,000 per month at the moment. The signals from the market are telling us quite clearly that new rental homes are needed. But such a home would cost at least €400,000 to build, a figure that would translate in a standard set-up to a monthly rent of €1,600, even at a relatively tight annual return to the owner of 4%.

Squaring that circle ‐ of costs well above affordable rental levels ‐ is the key challenge for policymakers looking to fix Ireland's rental sector in the 2020s. In other words, despite all the chaos of the last 18 months, it's the same old story for Ireland's rental market.