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Ireland’s rental market is broken – and could be heading for even deeper trouble

Smart Money: Renting is now a two-tier market, with the gap growing between those in existing tenancies and those looking for new ones

Ireland’s private rental market is one of the most expensive in the EU – with Dublin in particular standing out.

Tánaiste Leo Varadkar said this week that young people would not find cheaper rents in New York – which is true – but his comment that lower costs were only available in third-or fourth tier cities or rural areas is not really supported by the evidence.

Rents in Dublin, according to EU figures, are around the top of the EU league, with slight variations depending on the type of property involved.

A gap is growing, meanwhile, between those in existing tenancies – particularly those in situ for some years – and newer tenants and those currently looking for a property. We have a two-tier rental market.

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The shortage of property and high demand is pushing up prices for new rentals, but increases in existing ones have been significantly lower, largely due to the rent pressure zone rules, introduced in 2016.

This has created a two-tier market – expensive for those with existing tenancies, but really prohibitive for many seeking a place to rent. EU figures, dating back to last year, show that Dublin is the most expensive city in which to rent a small apartment, ahead of even Copenhagen and Paris, though below London and New York.

The comparisons do vary a bit depending on the type of property involved - and data from other sources shows slightly different results - but there is no question that Dublin is a very expensive place to rent.

And despite the rising rental levels for new tenancies, private landlords are leaving the market, complaining about burdensome regulation and taxation. Rising property prices are clearly also a factor here. But the rental market is broken and could be heading for even deeper trouble.

1. Rising costs

The survey this week by website Daft shows that rental prices are sharply on the up, increasing by 14.1 per cent over the past year.

Worryingly, the quarterly increase – July to September compared to the previous three months – of 4.3 per cent was, by a distance, the highest on record since the series started in 2006.

Economist Ronan Lyons, in a commentary on the report, pointed to an “extraordinary collapse in the stock available to rent” as the key reason for rising rental costs, with just 495 properties available to rent in Dublin on the first day of the third quarter.

This, he points out, is a function of the bounceback in demand after Covid, as well as the shortage of supply, a problem which has built slowly but steadily in recent years. In 2016, there were about 75,000 homes put up for rent over the course of the year.

By early 2022, that had fallen to less than 50,000 – and in the last six months, it has fallen again to about 35,000. A similar falling trend is evident in tenancies registered with the Rental Tenancies Board (RTB), down from close to 90,000 in 2015 to below 50,000 this year.

2. What the Daft and RTB data shows

The Daft figures, based on the ads on their website, reflect the rents on offer now for new tenancies. These give a good view of what is happening in the market. The other main source of data is that produced by the RTB, which is based on new tenancies registered with it.

The most recent RTB data is for the second quarter of this year – showing slightly lower figures at the time (a €1,464 national average). It shows an 8.2 per cent annual rate of increase in the rental for registered new tenancies in the second quarter - it will be interesting in time to see if its third quarter figures reflect the acceleration in rents shown by the Daft figures.

Either way, between the two we clearly get a good fix on what is happening in the market for new tenancies and the trends across the country. And a worrying aspect of the RTB figures is that the number of tenancies in the second quarter, at 12,701, was down 16 per cent on the second quarter. More evidence of the lack of availability of properties for rental.

However, what the Daft and RTB figures do not show is how much is paid on average by everyone currently in the private rental market. And because sitting tenants in many areas have seen rents rise more slowly that new rentals, due to rent pressure zone (RPZ) rules, the gap between what they pay and the cost of new tenancies is growing.

3. The two-tier market

There is no full set of figures for all existing tenancies. Even the EU data is based on ringing around estate agents, so presumably largely reflects the price for new tenancies.

However it is possible to make an educated stab. As well as their survey of what is on offer now in the market, Daft also have completed surveys of existing tenancies. While the company does not publish cash figure averages for this, it does use it to estimate the annual increase for sitting tenants. And it shows the gap is growing.

On average, rents for sitting tenants have increased by 3.4 per cent per year over the last decade, while those for new tenants have risen by an average of 7.1 per cent. Within the sitting tenant category, Dublin has increased by 4.9 per cent per year on average and the rest of the country by a modest 1.6 per cent.

Before rent pressure zones were introduced in 2016, it is fair to assume that new and sitting tenants paid rents which were quite similar, with a smaller premium than now for new tenancies.

The market operated differently, there was more supply and tenants facing a big rental demand could move. If we then go on to apply the Daft rental increase estimates since 2015 to rents at that time, it would suggest that average rents across the market now might be around €1,150 to €1,250, compared to a Daft figure of €1,688 for newly advertised tenancies. (Recent ESRI research based on CSO data estimated average private rents at €1084 in 2021, so the estimate above for 2022 looks reasonable, allowing for an increase in the meantime.)

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For Dublin the average of all tenancies might be in the €1,800 to €1,900 region, calculating on the same basis versus €2,250 now for new tenancies advertised on Daft.

Given that this average will be pulled up by newer, more expensive tenancies, the gap between more established and newer tenancies is now growing to be quite large.

The rent pressure zones have protected existing tenants, but newer tenants are suffering as the market is squeezed between low supply and ongoing strong demand.

The average for all renters looks to be €400 to €500 a month below the average for all new tenancies.

Nor is this to suggest that all is good for sitting tenants. A report in October by ESRI researchers Barra Roantree, Michelle Barrett and Paul Redmond found that affordability for renters was suffering, with rents up from €589 in 2012 to €1084 in 2021 meaning that those in the poorest 20 per cent of the population who were renting in the private market typically saw not far off one third of weekly disposable income going on rental. Rising rents and the cost-of-living squeeze in the meantime will have made this much more acute.

The gap between rents for sitting tenants and new ones also has one other key impact on the market - it makes it very hard to existing tenants to move, even if they want to because, for example, of increased family size or dissatisfaction with their existing property. And so the normal movement in the market is further constrained.

4. Warning signals

Unfortunately the trends in the market remain poor and the only thing which might reduce pressure on rents in the short term is a recession.

New research presented on Thursday by Goodbody economist Dermot O’Leary at a Housing Agency conference shows how rising costs and higher interest rates – requiring a higher return for investors – are likely to threaten apartment supply.

He calculates that monthly rents need to be well over €2,000 to make apartment building viable. In turn this makes them affordable to only a small section of the population and means that Government intervention on a wider scale is inevitable.

This is made worse by the ongoing withdrawal of private landlords from the market, illustrated by the latest supply figures. The Institute of Professional Auctioneers and Valuers pointed out this week that the number of termination notices received by the RTB in the first half of the year are 58 per cent up on the first half of last year.

This combination of threats to new supply – beyond what is already in the pipeline – and private landlords leaving threatens an even deeper crisis.