Is logjam in the rental market going to get worse?

Guest blog, Ronan Lyons: A little over a year ago, I outlined the turnover in the residential sales market as a key measure of the health of the housing market. At one point, in the depths of the crash, the typical property in Connacht was changing hands roughly once every 100 years – which we know is far too long and thus the market was unhealthy.

The same metric can be used to examine the rental market, particularly in light of recent figures that rental inflation continues to climb, pushing average monthly rents to fresh new highs. Unfortunately, we don’t yet have the full figures from the 2016 Census but we can at least give a rough picture of turnover in the rental market.

For example, in 2006, there were about 145,000 homes in the country in the private rented sector. That year, just under 80,000 rental properties were listed on daft.ie, suggesting that the typical property changed hands slightly more often than once every two years. In Dublin, indeed, the typical rented home came back on the market after 18 months.

By 2011, this had slowed down a little, and of the 300,000 or so private rented homes in the country, just under half were listed on the market that year. In both Dublin and in the country at large, the typical lease length was two years. What is interesting is that, despite the huge growth in the sector – the number of private rented homes more than doubled in just five years – the turnover was similar.

It is likely that when the figures for 2016 come out, they will show that the private rented sector has not shrunk since 2011. So in other words, we are still looking at a sector with at least 300,000 homes in it – and possible more. Even if it were just 300,000, though, what has changed dramatically is the fraction that comes on the market every year.

In 2016, there were less than 70,000 rental listings nationwide. What this means is that fewer than a quarter of rental homes came on the market. Flipping that stat around, the average lease length is now more than four years, having been two years in length as recently as 2011.

On the face of it, this may seem like good news: Ireland is becoming a nation of long-term renters. This is the benign interpretation. There is nothing at all wrong with people renting for longer (As long as they are also putting money away for their futures). However, the figures are also consistent with logjam in the market.

It is reasonable to think that the typical landlord in Ireland does not fully review the rent as often as they are legally allowed. What this means is that many tenants in Ireland enjoy below market rents. This creates an incentive to stay put, even if in other circumstances you might have moved.

So when a group of students goes away for the summer, they may keep paying rent, so as not to “lose their place”. Or where a group of young professionals are sharing a house, this group may keep rotating, despite couples being formed or people change jobs.

This has become a much more pressing concern, now that Ireland has moved from a “rent resets when empty” model to system where whatever level of rents held in late 2016 is now frozen in, for at least a few years.

The Rent Pressure Zones risk creating – or re-creating, for those with long enough memories in the Irish rental market – a two-tier rental market. This would be the case even if the entire country were deemed a Rent Pressure Zone (as increasingly seems likely, given the figures in this week’s Daft Report).

On one tier are those properties whose rents were increased steadily by landlords throughout the period 2011-2016. These are effectively market rents, albeit from now on the increases will be slightly capped.

The other tier consists of those properties whose rents were not increased by landlords during the same few years, believing that they would get the chance to in the near future, once their tenant ultimately moved on. But the act of bringing in Rent Pressure Zones itself has made moving on less likely: why give up a low level of rent?

Not only that, when they do ultimately move on – for example, if they are buying a home to live in – tenant and landlord are likely to cooperate and find a new tenant through word of mouth. What landlord wants the hassle of 200 people turning up to view something that’s being rented at 40% below market rates?

Again, word-of-mouth may sound benign, but those who lose out will disproportionately be those on lower incomes, on some form of State support, or who have just moved to the country. Like many other aspects of life in Ireland, the dice in the rental market have just been loaded in favour of insiders.