LORCAN SIRR looks at the private rented sector in Ireland and what needs to be done to resolve its many problems.
Let’s be honest: housing in Ireland is a mess. From boom to crash, governments and senior civil service management have consistently been two steps behind events on the ground. Instead of directing and ensuring the key elements of supply and affordability, successive governments have either undermined policy or simply reacted to events as they happened.
Their response has frequently been to ‘leave it to the market’ to resolve issues. ‘Leaving it to the market’ in Irish politics isn’t an ideological preference – Irish politicians don’t express ideologies (they haven’t the courage of Thatcher or Reagan) – it’s just an easy way out.
Couple this with a preference for anecdote over evidence – indeed a complete reluctance to countenance facts and figures – mostly for political gain (see decentralisation, for example), and what results is a dysfunctional housing market and huge swathes of people in negative equity, thousands of useless empty houses, serious mortgage arrears and many people forced away from their housing preferences, both in tenure type and in location.
Part of the problem has been a reluctance to develop a proper housing policy – a document to guide what is built, by whom, how, where, rented or owned, and so on: developed countries have them. In Ireland, the last official policy dates from June 2011 back when Willie Penrose was Minister for Housing (there’s a new one due about now), and except for the notion of ‘equity across tenures’, the document – all three pages of it – was not really worth the paper it was printed on.
The problem is that a decent housing policy could potentially impose limits on what potential voters and constituents might be able to do, and given the natural inability of many politicians to see beyond their county boundary, a national policy couldn’t be seen to be having local impact. We will wait and see what the new version will be like.
The rise of rent
Part of the fallout from this housing mess is that attention has been focused on the private rented sector, that part of the market that has traditionally been thought of as accommodating students, separated fathers, immigrants and the socially marginalised. Some still think of it in those terms, but for several reasons the private rented sector has moved on, and is now a formidable component of the overall housing sector. Indeed, not only is it socially important (housing those who need to be housed), the private rented sector is also very economically important (housing those who come here to work in foreign direct investment [FDI], for example).
Some basic figures might help to illustrate this importance:1 home ownership in Ireland has been declining for some years (it’s now less than 70%), and nationally, almost one in five households (over 300,000) now rent from a private landlord. In urban locations like Dublin and Galway, this is more than 30%. Of all the households formed between 2006 and 2011, about 86% are in the private rented sector. From 2002 to 2006, this was about 2%. Since local authorities (disgracefully) stopped building social housing and began forcing applicants into the private sector, about one in three private renters are in receipt of some form of rent supplement.
The tenant profile still consists of the immigrants, socially marginalised and separated fathers, but it has expanded to include those who rent because they have to because they have left a repossessed home or because they are saving to buy a property at some stage. There is also a large cohort of people who are now choosing to rent. These are people who don’t want to buy a property, or who are making the trade-off between owning a property and possibly having a long commute, or renting somewhere they could never afford to buy, but having a short commute perhaps, living in or near where they would ideally like to be. This is a quality of life trade-off, and many are making it.
Then there is also the significant tranche of renters who come here to work, mostly for new FDI companies (Facebook, Twitter, Google, etc.), and who, like the previous group, are highly educated and well paid, but their culture, jobs and career paths mean that they will always rent where they work. Both these latter groups are demanding and cultured; they rent in their thousands, but no damp hovels for them.
In the 1970s and 1980s, when Ireland had a manufacturing base, the majority of a company’s expenditure was on materials. Now the largest proportion of spending goes on wages. As the amount of net salary an employee spends on rent increases, their first port of call is to their employer to ask for a pay rise. High rents drive wage demands, and affect both a company’s ability to afford staff, and also, equally importantly, their ability to attract staff: working in an expensive city is not always an attractive option for potential employees, no matter how good the local pubs. Renting, rents, the availability of suitable accommodation and employees’ ability to pay for it are all factors in FDI competitiveness.
On the landlord side, things have changed less. Landlords are still dominated by ‘amateur investors’, the mom-and-pop landlords, the vast majority of whom have just one property. This is not really that different to many other countries. In Ireland, however, these landlords are not buying for steady income stream, but in the expectation of capital gain. Irish landlords frequently have a perverted interpretation of what constitutes a good investment: professional landlords want nothing more than a tenant on a long lease, paying regular rent, reviewed under a strict process (in fact, the longer the lease, the more valuable the investment); amateur landlords want the income stream but not the long lease, nor the regular rent reviewed periodically. They struggle with regulation and economies of scale. At least 40,000 landlords are in financial arrears (mostly ‘new’ landlords), and about one-third plan to sell their existing properties. This is not good news.
In more recent years, professional landlords have moved into Ireland. These are large-scale landlords, buying hundreds of properties at a time and sometimes hiring professional management companies to run them on their behalf. One of the problems these companies face is sourcing suitable properties to buy. Ireland has never had a tradition of constructing dedicated build-to-let properties, nor of building at a scale suitable for investment. If these professional landlords remain, we may see the beginnings of this change.
There is the argument that these are foreign companies and rents are therefore effectively going out of Ireland. This is nonsense: if that line of argument is taken to its logical conclusion then Tesco should be asked to leave – it absorbs far more money than any professional landlord (so much it refuses to divulge its Irish profits), and is far less important than any housing function.
But there are problems aplenty in the private rented sector for landlords and tenants, and given renting’s new economic importance, these quickly translate into national problems. The first is national and local government’s refusal to engage at a suitable scale with its people in need of housing, and instead forcing them into the private rented sector. This is inappropriate for the applicants and the sector. An initial solution here is to make housing waiting lists national and taken out of the control of individual local authorities. After that, there is no option but to provide social housing either through State funding or through the involvement of pension funds or the like.
On the supply side, it is worrying that so many landlords are thinking of selling their properties (nearly 70% report that their rent doesn’t meet their mortgage obligations each month). To increase supply, Ireland needs more landlords. However, being a landlord is not really regarded as being a serious enterprise, and it should be. There are several ways to encourage people to stay in the market, and also to encourage more to become landlords (as there is room for both large-scale and small-scale participants). Giving 100% mortgage interest relief would be one initiative, as well as allowing tax relief on capital expenditure, as is done in other jurisdictions.
On the demand side, renting is here to stay, but the experience needs to be improved. A major source of aggravation, deposit retention, is set to be resolved with the establishment of a deposit retention scheme to be run by the Private Residential Tenancies Board, but security of tenure should also be improved. Security of tenure is much more than just long leases – it also concerns the reasons tenants can be asked to leave the property (or indeed, their home), and right now, the legislation is weak where it matters here. Get non-paying and lease-breaching tenants out as fast as possible for sure, but good tenants should have the security of knowing they have a home for as long as they abide by the lease.
Finally, for tenants, employers and the economy in general, is the issue of affordability (more rent expenditure means less money to spend elsewhere each month). It is time to revise the system of rent review in residential leases. The annual rent increase of an unknown amount is unhelpful and induces risk and uncertainty in the market. There are various options available, but proposals such as increasing rents by no more than a specified amount for the duration of a lease cycle (currently four years), or increasing rents by no more than a specified amount in total over the lease (e.g., rents can’t increase by more than 20% in four years) should be seriously considered. Landlords typically baulk at such ideas, but what they might (or might not) lose in rent, they will more than gain in fewer voids and better quality tenants.
What is needed
Ireland’s housing market has been ruined by vested interests, lobby groups shouting loudly and parish pump politics, with not a notion between them of a fact or statistic to back their anecdotes or demands. It is time for this to stop and for only evidence-based policy to be brought forward. The Housing Agency is there to do this, and right thinking ministers will listen to it and only build what is needed, where it is needed, for whom it is needed, and that includes for renting and renters, landlords and tenants alike.
1. The figures in this article are a combination of Census statistics and results from the Private Residential Tenancies Board’s study on The Future of the Private Rented Sector, published in October 2014 and available here: http://www.prtb.ie/media-research/newscentre/ future-of-the-private-rented-sector-in-ireland-published.