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Still some time before a healthy rental market

The figures in this latest Rental Report do little to assuage the worries of policymakers, renters and other interested in a healthy rental market. For the 27th quarter in a row, rents have risen nationally, quarter-on-quarter. And for the 13th time in those 27 quarters, rents rose quarter-on-quarter not just on average nationally but in each of the 54 markets analysed in the report.

There are some crumbs of comfort. The national annual rate of inflation was 8.3% in the first quarter of 2019, its lowest level in five years. A second silver lining is that rental inflation is lowest in the Greater Dublin area. In Dublin, rents are 6.8% higher than a year ago – and in Leinster, rents are 7.3% higher. In other parts of the country, where rents are on average lower, often much lower, inflation remains above 10%.

But these are small consolations, at best. Nobody could argue that an inflation rate of 7% or 8% is anything like a healthy outcome. Ireland’s rental market remains starved of supply. This can be seen in the measure of availability included in the report.

On May 1st, there were just 2,700 properties available to rent nationwide on This is the lowest ever figure for stock on the market, in a series that goes back to the start of 2006. The length of this series allows us to put the current rental shortage into perspective. During the Celtic Tiger period, rental stock bottomed out at just under 4,400 in early 2007. Only once in the 41 months and counting since the start of 2016 has the number of rental homes on the market been above this Celtic Tiger low – and that was in December of that year, an atypical month in the rental market.

It has become fashionable among some market commentators to deny the realities of supply and demand. The roots of this stem from the Celtic Tiger period, when – at first glance – it seemed that supply and prices moved up together. Prices rose at double-digit rates when the country was building twice as many homes as it needed – surely, supply is irrelevant for prices?

The answer to that conundrum is, of course, that demand was increasing at an even faster rate. Work from my own doctorate suggests that credit conditions alone drove higher sale prices 2001-2007 and, once loose credit is stripped out, the normal relationship between supply and prices was still there. Indeed, that is why prices fell by so much once loose credit has stopped, 2007-2012.

A similar argument has now emerged in the rental segment. It argues that supply cannot be the answer because newly built rental supply – for example in the form of purpose-built student accommodation or more recently “PRS” built-to-rent homes – is expensive.

This misses the point of new supply entirely. To see why, consider the example of cars. Suppose a city had 100,000 cars, all of which were old and well-travelled, and then imported 50,000 brand new cars. Clearly, any one of the new cars will be more expensive than the old one. And, if you took a simple average price of all cars, you might think cars had become more expensive.

But the true measure of the effect of the new cars is what happens the price of the old cars. The influx of new cars would mean that each of the older cars has now fallen in price. This highlights the importance of measuring on a like for like basis, when thinking about price trends. Even if newly-built rental accommodation is more expensive than the market average – which incidentally is almost always true, given the high spec of new homes – the price of other accommodation will be lower than if those new homes hadn’t been built.

The figures in this report actually tells us more than just that the basic laws of economics apply to the Dublin rental market. They also suggest that the level of supply needed for rents to not change is about 13,000 per quarter, or 1,000 per week. Currently, the Dublin market is getting half that – about 500 per week.

To close that gap, Dublin needs to build tens of thousands more rental homes. How many depends on how frequently these change tenants. Suppose the average tenancy last three years, which is somewhat shorter than is currently the case (and thus lowering the total number of homes needed). In that case, Dublin would need build an extra 500 rental homes to come on the market each week for those full three years, to close the gap between the 500 that are coming on and the 500 that are needed.

That’s almost 80,000 rental homes that Dublin needs to build, as soon as possible. The solution is not going to be in hoping that amateur landlords price out first-time buyers in the existing housing stock. Rather, the solution is clearly going to involve new purpose-built rental supply, made by professional developers and backed by long-term international capital. Firms that do this are hardly cuckoos, pushing us out of our nests. They are swallows, each one bringing us closer to a summer.


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