Amid all the uncertainty and excitement concerning bail-outs and banks it can be easy to lose sight of what is important to long-term growth prospects – the performance of the real economy. One important aspect of this is the housing market. While the dangers of a housing bust were well flagged, its full consequences, especially in terms of the financial system, have proved even more serious than anticipated. For the housing market itself we have seen a collapse in prices since 2007 and, as a result, a collapse in building. Unthinkable though it may be under current circumstances, eventually new building will become profitable producing an inevitable supply response. At some point in the future things will change – we will eventually run out of vacant dwellings in desirable locations and prices will begin to rise.
It is far too early to predict when the market will turn. All the uncertainty about the macro-economy will continue to have serious consequences for household confidence for some time to come. Households, even if they were not scared before, must be scared today. Even with secure jobs and reasonable after tax incomes it will be some time before many people are prepared to contemplate a major investment, such as buying a house. House prices, though falling much more slowly still have some way to go. This is also suggested by the current yield on rental properties in Dublin, which is below what might be considered its “equilibrium level”. However, the real economy continues to develop and the backdrop against which the housing market should be viewed is also changing.
One of the early and more surprising developments arising from the fall in house prices was an increase in the number of households in 2008/9. Over the period 1995 to 2005 the proportion of people aged 25 and over in Ireland who lived in independent households – had their own pad – did not rise significantly. On the face of this it was surprising given the huge increase in incomes. However, the very high cost of accommodation to rent or to purchase meant that Irish people shared an apartment or house or lived at their parental home longer than was common elsewhere in Europe (a similar pattern was apparent in Spain). With the fall in rents in 2008/9 this pattern changed and those who could afford the new lower prices (having jobs) took advantage of the more favourable market. This change in behaviour shows that people are sensitive to prices and rents.
In Dublin and Cork an important factor has been the desire by those who financed much of the recent build, banks (and NAMA), to see some income coming in even if they could not be sold. (It is important to remember that NAMA, just like an old fashioned bank, wants to make money – it is unlikely to adopt policies that would destabilise the market.) Hence the supply of rental accommodation increased and prices fell. In turn, as discussed above, more people entered the market, renting where before they might have bought. The result has probably been a reduction in vacant dwellings in the greater Dublin area. The recent Department of the Environment study shows the relative stock of vacant dwellings to be lower in Dublin than in much of the rest of the country.
What the DAFT rental index shows is quite interesting. Having seen very substantial falls in 2008 and 2009 it would now appear that rents in Dublin have stabilised. This is apparent from the data for the last few months. It is clear from this that the supply of properties to rent is equal to the flow of new households being formed – the market is in a temporary equilibrium. This is happening in spite of the very significant outflow of people through emigration. This situation could persist for some time with stable rents. However, at some point, with the supply of properties fixed, new household formation through new renters could begin to put pressure on the market. This may not seem likely now with major fiscal retrenchment in prospect and, hence, low growth likely in 2011. However, the recovery in the tradable sector of the economy, which is clearly under way, will eventually begin to drag the rest of the economy back to growth. Then, with employment rising, incomes stabilising and prospects becoming brighter, more people will seek rental accommodation. In turn, as the excess supply dwindles rents will begin to rise. Initially such a small rise in rents will not have much impact. However, when it becomes well established it will have a number of effects. It will cause some of those renting to assess whether, in the face of rising rents, house purchase might be attractive. Eventually, as returns for those owning rented property rise and when there is some limited bounce back in house prices, there will be a gradual perception that Ireland will need some more dwellings in high demand locations.
All of this is some way off today. Much will depend on the vigour of the recovery in the tradable sector. In July when we envisaged a fiscal adjustment of €7.5 billion over the period 2011-14 I felt that such a turnaround could occur in 2012 or possibly 2013. With the doubling of the fiscal adjustment, and its consequential effects in depressing domestic demand, this could be postponed till 2013-14.
The first sign that things are beginning to turn will be a move towards rising rents. This will predate any recovery in house prices and any new building. As of today it is clear that rents have stabilised. From now on I will be watching the DAFT index seeking signs that rents are beginning to rise. I don’t expect to see much action over the coming year but time will tell.
Young, prospective home-buyers with steady(ish) jobs, no debt, a bundle of cash burning a hole in their accounts and a serious case of nesting-syndrome, are back on the weekend viewing circuit, say estate agents.
They tramp in and out of three-bed semi’s, city townhouses and dez-rez river-view apartments in all our major cities, then mark them off the listings they’ve torn out of the weekend’s property pages.
It’s Spring, for crying out loud; estate agents and property supplement editors take note: it’s what singletons and young couples do on sunny Saturday and Sunday afternoons in April and May when they can no longer suppress the image of their future offspring’s carriers, buggies, cradles, cots and toys filling their 500 square foot rental apartment or tiny city centre cottage to capacity. It does not represent a ‘green shoot’ or other sign of ‘recovery’.
The sensible viewers – at least the ones who read the rest of the domestic news – will ignore the self-serving ‘we’re out of recession’ nonsense, and keep paying over their rent.
They at least know that unlike friends and colleagues who bought property in the bubble years, they can always hand in their notice to their landlord and get a nicer place if they want, probably at a much lower price than what they’re paying for the past few years. If they lose their job, they’ve got a cushion of cash they can use to take the time to find another one, to retrain, to set up a business or immigrate.
The latest quarterly Daft.ie rental figures clearly show that this is still a renter’s market, and that this isn’t going to change so long as supply outpaces demand.
Other recent reports, from the CSO, the Irish Property Investment Report from the Irish Mortgage Brokers and PropertyWeek.ie and the ESRI/PTSB House Price Index also show that residential property prices are grossly overvalued and still falling and that there is still strong outward migration and unemployment. (Using yields as the starting point, the highly technical Irish Property Investment Report suggests that investment properties are currently overvalued by an average of 37% in Dublin, 43% in Cork, and 39% in Galway).
Throw in the reluctance of the banks to lend, the bad, bad news about the euro and indebtedness here and in the eurozone, and the longer term rental market starts to look a little firmer.
Property investors, with buy-to-let residential properties in Dublin and Cork cities, can also take a little reassurance from these latest Daft.ie figures. Their rents have stayed pretty static, with Dublin city centre rents actually up 1.3%, though other areas of the city and county are either neutral or down by 0.2% to 0.4%. (Year-on-year, rents are still down in Dublin between 13.3% and 15.9%, depending on the area).
If there’s any good news for the rest of country, the Daft.ie figures show that while the fall in rents continues, it’s at least at a slower pace than it was during the same quarter in 2009, when minus 4% and 5% was recorded.
Aside from Cork City, landlords are still struggling this quarter. Their rental income is down 3.1% in Limerick city, 1.2% in Galway and 0.5 in Waterford.
The year-on-year collapse in rental income is pretty shocking, given how borrowing rates have started creeping up, especially for the amateur landlords who may not have secured interest-only trackers or fixed rates. They are looking at fall of 11.8% in Cork, 8% in Galway, 12.9% in Limerick and 11.2% in Waterford.
Landlords with weak hearts should desist from looking at Daft’s estimate of the size of the fall since the 2007 rental peak.
As someone who spent more than half my life as a tenant, first in Montreal, a terrific renting city, and then here in Dublin in the 1980s, I think the development of a strong rental market in Ireland is very welcome. The quality of properties has soared (even it the management of them often leaves something to be desired). Regulation isn’t too onerous for landlords and provides plenty of flexibility for tenants.
If there is a danger, it is that the loss-making nature of so many buy-to-lets in particular – national average yields are 3.6% overall – could result in a deterioration of the rental housing stock if amateur landlords find it increasingly difficult to square the rent they receive with the cost of servicing loans and maintaining or periodically upgrading their properties, a necessary expenditure if you want to command a higher price.
The real economy, as opposed to the statistical one so beloved of economists, may be dis-improving more slowly, but it’s going to take more than fractional improvements in the pace of unemployment, Exchequer tax returns, or even consumer confidence to restore it to a state of recovery that the ordinary person can recognize.
And that’s only going to happen when they see that foreign and domestic businesses are hiring again, exports and domestic consumption is strong, the banks are solvent and open for business, the deficit and national debt is being paid off, and the euro is stable.
Until then, renters should be grateful that at least the size and quality of the rental market in this country is so robust: it sure beats the bedsit-land most of us lived in during the 1980s.
The importance of the Daft.ie database cannot be overestimated. It is surely unconscionable that in a country suffering the after-effects of a house price bubble, there is no real-time or even monthly house price index from any government agency. The unfortunate demise of the ESRI/PTSB index highlights this. Daft.ie now stands alone as the only national monthly index. We are, as a nation, steering blind, not to mention dumb, on the seas of house price deflation.
Given that, what do we find? Is the crash over? Yes, if you live in NAMA-land, a country wherein the valuation of assets to be transferred has been set at their value as of end-November 2009. In the world wherein the rest of us live, the crash continues. House prices continue to fall, albeit at a slower pace than heretofore. Nationally, in the first three months of 2010, the average asking price of a house was a shade under €235,000, down one third from the peak of early 2007. The fall during the first quarter was 3.4%, the smallest quarterly decline in almost two years. Year on year, the fall in the first quarter of 2010 was 18%, a slight decline on the record year on year fall of 19% in the third quarter of 2009.
So the crash is slowing. However, it is not over. The Daft.ie index peaked in May 2007. To expect the trough to be reached less than three years later is to fly in the face of historical evidence. Referring back to Morgan Kelly’s prescient, eye-opening ESR article which for many of us represented the key moment when our critical faculties on property were rebooted, a fall of 50% is likely. Based on a straight line projection of average declines in value since the peak this would see another 18 months of declining prices. That would be 50 months of house price falls, or just over 4 years, towards the lower end of historical experience. It is probable that as we decline towards the trough, the speed at which house prices fall slows down. And this is what we are starting to see – in the last six months, the average decline has been lower than the previous six months, itself lower then the period before.
Further evidence that this could be the case is that the time to sell is again rising. In Dublin, houses are spending longer, over five months, before selling, a rise from just below 4 months previously. These Dublin figures are reflected countrywide. Buyers clearly are factoring in further deflation (apart from one buyer, NAMA, for whom the crash is over…) and the stock of houses for sale remains very high. Dublin is a partial exception – in the capital, there is some evidence of clearance is emerging, with the total stock for sale having fallen by 20%. Much of this decline was from houses that were on the market for more than six months – evidence that a buyer can be found even in a falling market, if the price is right. Rural markets appear to be “marking time”.
Nationally, nowhere shows less than a 25% fall from peak prices, with Dublin leading the way, showing falls of 35% and more. The implications of these figures, continuing as they do a trend towards a bottom that we have not yet reached, are pretty horrid for NAMA. What’s horrid for NAMA is horrid for all of us, because – for good or more probably ill – our futures are all bound up with the failures of NAMA.
House prices have continued to fall since November 2009, the date chosen (why, on whose advice?) by Minister Lenihan as the valuation date for NAMA. Based on Daft.ie figures, house prices have fallen by a further 4.1%. Applied to a €50bn portfolio, that’s a €1.5bn excess that will be paid over what would have been the case had the minister waited. Put it another way – the entire public sector pension levy has been squandered on a needless overpayment. A further implication for the economy is that the emerging problem of negative equity will deepen – negative equity acts as a bar to labour mobility, to discretionary expenditure, and ultimately to economic growth.
The government cannot, try though it will, stop prices from falling further. It can only try to stem the losses to banks (and many suspect, with little evidence but much conviction, to developers) with our money.
The latest Daft rental report is just out and it shows that rents rose by 1% in January. It’s probably still too early to call as rents are still down 25% from peak, but the rental market may have reset to a new level and stabilised.
16th February, 2010 – Rents across the country rose by just over 1% in January, according to the latest report published by the property website, Daft.ie. This increase while marginal is the first time rents have risen since they began to fall 24 months ago. The national average rent now stands at €765, almost 25% below peak levels seen in early 2008.
The January increase follows sharp falls in rents during 2009. Over the course of the year, Dublin rents fell almost 19%. Rents in Cork, Limerick and Waterford cities fell by 16%, while Galway rents fell by 11%. Elsewhere in the country, rents fell by an average of 15%.
Over the past 2 years the number of properties available to rent has increased from an average of 6,000 at any one time, to over 23,000 in August 2009. In February 2010 that number has fallen to 19,000 – a drop of 20%.
Commenting on the report, Ronan Lyons, Economist at Daft.ie said: “It is too soon to say definitively whether rents have levelled off, but the January increase does seem to be broadly consistent around the country. The levelling off is most likely a result of a steady fall in the number of properties available to rent nationwide. Over the past 5 months we have seen the stock of property available to rent fall by more than 20%.”
For further information please contact:
Patrick McCann 1800 911 110, Right Price Rentals.ie – email@example.com
Michael Taft, Political & Economic Researcher, UNITE, commenting on the latest Daft research on the Irish property market.
The 2009 rental market provides further evidence of an unbalanced, boom-and-bust property market on the slide. National asking-rents fell by 15 percent, consistent with falls in industrial, commercial and retail rents. End of 2009 rents were 12 percent below end of 2002 levels. Stock over-hang, negative equity, plummeting investment – you couldn’t write a worse script.
Though numerous commentators are talking up the prospect of ‘turning the corner’, we may be entering a period of what the IMF has described as a ’statistical recovery but a human recession’, something the Government’s deflationary policies are clearly engendering. Their fiscally irrelevant cuts in public sector wages and social welfare rates (despite claims, such cuts will have little impact on the Exchequer’s deficit) presage a general drive to depress income and growth. January redundancy notifications exceeded the 2009 monthly average. Consumer spending could come under pressure from anticipated ECB interest rate hikes later this year (the domestic banks will beat them to it). Some may be turning the corner; the rest of us are walking a different street.
Falling rents may be welcomed by tenants but this may come at the price of reduced investment and more stock withdrawal (in the last six months of 2009, 20 percent was withdrawn – a result of over-concentration from the buy-to-let and tax-shield sectors). Rising rents – and January 2010 saw a slight increase, focused mostly on inner city Dublin – will be welcomed by landlords and their creditors but hardly by tenants, and certainly not by the enterprise sector which will suffer from displaced spending and upward wage pressures. The interaction of falling incomes, rising interest rates, higher unemployment and emigration could break in any number of directions for the rental market – most of them not good.
We need a ready supply of quality units at affordable rents which nonetheless provide a solid return to maintain investment (yields in 2009 were marginally above 2006 levels but this may come under pressure by next year without rent hikes). We need this to assist labour mobility and provide sustainable land-use. This is all the more the case when dealing with a commodity that is a social need, a special kind of good, and not just another item of consumption or capital.
To analyse the rental market using traditional instruments of supply, demand and return-on-investment can only take us so far. A significant section of the market is being kept afloat by massive public subsidy through rent supplement, the Rental Accommodation Scheme and the prospective social leasing arrangements. The escalating proportion of rent-subsidised tenants (estimated to be between a third and half of all tenancies) is such that traditional demarcations between ‘public’ and ‘private’ are no longer illuminating. Supply, demand and ROI are increasingly determined by public policy, not alleged free-acting market agents.
Historically, the private rented sector has been ignored by Governments although recent reforms such as abolishing bedsits are a welcome step. Nonetheless, the sector remains a fragmented, under-capitalised ‘cottage’ industry, lacking the professionalism and modern synergy with a strong regulatory culture that prevails in other EU countries. Much of this short-coming can be put down to the lack of institutional investors, insufficient regulatory over-sight, limited powers (and resources) for local government, and insufficient public capital.
We require a fundamental overhaul in the rented sector to increase investment, standards and tenant-safeguards while maintaining consistent rent levels and long-term yields. How do we get there from here? In other countries long-term stable institutional investment is attracted through special vehicles such as Real Estate Investment Trusts in the US. Here institutional funds were channelled through buy-to-let which contributed to the fragmented, boom-and-bust rental market. In other countries, rental markets provide life-long living, accommodating a range of demographics from singles, to families with children to pensioner; here, local authorities, shifting from managing housing stock in blocks and estates, are increasingly managing the leasing of a wide variety of private sector units spread out geographically and varying widely in standards; indeed, local authorities have found it difficult to find accommodation that reaches its’ standard for tenants.
The public sector will be crucial to achieving such a transformation. Though tax incentives and other subsidies will be essential, large-scale institutional investment will be understandably wary at first. To kick-start this process, new municipal housing authorities or publicly-structured housing associations/cooperatives could be established. This would provide economies of scale, lower input costs per unit, raise management standards and design a market accessible and attractive to all demographics. Such vehicles could attract institutional investment, even by guaranteeing yields over the long-term. To the extent that such bodies would provide for both the public and private markets, traversing a divide that doesn’t functionally exist in many sectors, this could reduce the cost to taxpayers.
This transformation would be accompanied by complete financial, rent and yield transparency. There is no reason why data regarding rents paid, yields and available stock should not be freely available to all. The private rented sector is plagued by lack of data which is why Daft provides a considerable public service.
In this new dispensation, the fortunes of the small-scale investor and provider could also flourish. Working from a new base-line of standards, rent levels and yields, the committed investor could inject flexibility into the market in terms of product differentiation, location and provision without disturbing the underlying stability.
As Dr. Nat O’Connor of TASC points out, the idea that middle to high-income people will all become owner occupiers is coming to an end. Hence, the renting demographic will broaden. In short, the future will be renting.
All the more need, then, for a quality-driven market – stable, professional, and profitable. This will no doubt require considerable upfront public investment. But the social and economic returns would be high. And such investment could be a small antidote to the Government’s deflationary policies. This would help ensure that any statistical recovery is translated into a human recovery.