Advisors.ie

Our Government is Operating with Faulty Information on Rents

Karl Deeter: Ireland’s just had its knuckles rapped by the European Union for its use of rent control in pressure zones

The European Union has been critical of Ireland’s use of rent control in rent pressure zones, a regulation that now covers more than half of this country’s leases.

Politicians fell for the idea of a rent fix, but what data did we use to make the decision, and what will happen next?

The rent control issue effectively amounts to “headline rents”, or the rents which set the benchmark (there is a more complex definition, but it doesn’t apply here).

This is an important point. Imagine if we said that “jobs in Ireland now pay €100,000”, and we made that announcement based not on what everybody was getting paid, but only on what some new hires were being offered. Would that skew the figures?

If you were to conduct this survey in certain parts of Dublin, where the tech sector is busy hiring and poaching staff from each other, then it may appear that this is indeed the land of milk and honey.

This is where, as an analyst, the job of seeing through the noise becomes difficult. It isn’t good enough to say that “rents went up by 10 per cent”, for example, without clarifying what level they were already at.

To you and me, “rents” would probably imply all rents. But, in truth, it means new leases. They are the rents that set the benchmark. This leaves out the vast majority and main bulk of all leases which are somewhere within a tenancy.

Let me explain. When you register a residential tenancy, you have to register it with the Residential Tenancies Board (RTB, formerly the PRTB). This forms our “rent index”. Yet, because of how it is generally reported, you’d be forgiven for thinking that everybody was paying the rents listed in the index.

A massive area in tenant rights is that of security of tenure. In the past, it meant that a tenant, upon satisfaction of certain requirements, had the automatic right to a four-year tenancy. This is why tenancies must automatically be re-registered every four years.

This was recently changed to six years. Canny observers will notice that the RTB didn’t change its “renewal dates” to reflect this, and even though a tenancy can last six years, the board will still ask for more cash in year four.

This aside, the reality is that huge numbers of tenants are in leases which were signed years ago, and the rents they pay are not being recorded as prices change or otherwise.

Example: a landlord has a tenant for three years. The tenant decides to move out. The new tenant takes up residence and pays the “new market rent”. Meanwhile, the RTB has no idea what the previous tenant was paying in the second or third year of their tenancy.

For this reason, it may appear that the rent takes a huge jump (or fall) when the new rent is set. But that isn’t what happened at all. Something happened, but official statistics were unable to capture it.

In a nutshell, only a certain amount of tenants are paying the headline rents. However, in creating a rent control policy it is deeply unlikely that the policy makers knew how many tenants were paying headline rents because nearly all of the market is largely invisible or opaque at best.

That is why, armed with faulty information, we made a faulty policy decision and one which the EU commission has correctly criticised.

What comes next is inevitable. One of the first effects will be in areas just outside of rent pressure zones. Prices there will increase because of the outward movement of demand, in particular as rental stock remains over-occupied in the high demand areas. The incentive to leave falls when you introduce rent controls.

Of bigger concern is what will happen within rent pressure zones when the rules end in 2019. It is hoped that, by then, we will have enough supply to have solved the problem. We have already covered why supply is lower than official statistics imply, and how catching up is so problematic, so an “all is well” result is unlikely.

The likely outcome (assuming there is not an EU/worldwide crisis) is that more emergency legislation to control rents will be implemented in our cities, even though we were promised that wouldn’t happen, but political promises are like piñatas: designed and made with eventual destruction in mind.

Perhaps we will see rents really catch up and suddenly surge ahead, which will drive money at a faster rate into real estate and act as a fulcrum upon which the latter stage of our property cycle occurs. That would really put the boom into our eventual bust.

Both outcomes will have equally dire consequences: the first leads to eventual destruction, the latter to more near-term destruction. Just because we falsely orchestrated the containment of a problem doesn’t mean it has gone away.

Karl Deeter is compliance manager at mortgagebrokers.ie. Follow him on Twitter: @karldeeter

this article originally appeared in the Sunday Business Post on the 26th of March 2017.