Wednesday, 5 October 2016

The Private Rental Crisis: Towards a Solution

P.J.  Drudy: A recent survey of rising rents by is a further wake-up call for all of us and for the government.  During the last three months alone private sector rents nationwide rose by almost 4% and have risen 39% since 2011. 

In Dublin rents rose by 11% last year and are now above their unsustainable peak in 2008.  If these sorts of increases occurred in any other necessity (and housing is surely a necessity) people would take to the streets.

A recent advertisement in The Irish Times by one multi-national landlord, Kennedy Wilson, sought rents in the Dublin area as follows: one bedroom - €1,700-€1,900; two bedrooms - €2,250-€2,400; 3 bedrooms - €3,000-€3,400.  

Why has no serious action been taken to date to contain such rents?  It is largely to do with philosophy or ideology held by those who believe and argue that the market forces of supply and demand will eventually solve the problem.  One must not interfere with the market! 

When there is excess demand which drives up rents and house prices they argue that supply will come on stream in response and drive down prices to a so-called “equilibrium” or balance between supply and demand.  All will be well in due course. Supply, supply, supply is the mantra which will solve the problem.

Problems with supply-focused solutions

Unfortunately, real life is not as simple as that.  For a whole range of reasons supply does not come on stream as quickly as predicted and rents and house prices continue to escalate.  Even with a massive increase in supply far in excess of requirements up to 2007, prices had continued to rise inexorably until they were finally halted by the crash.  This was yet another example of “market failure”.

How can we prevent a continuation of escalating rents?  As we were reminded in a recent editorial in the Irish Times, “other European countries link rent increases to the cost of living to protect competitiveness and dampen wage demands.  Why not here”? 

In 2015 the Government’s own advisory body, the National Economic and Social Council, advised the government to introduce a system of “rent regulation” in association with actions to increase housing supply and security of tenure. More recently in June 2016, the Report of the All-Party Oireachtas Committee on Housing and Homelessness again recommended that rent reviews should be linked to an index such as the Consumer Price Index and reviewed annually. 

To date no action along these lines has been taken although the recent Action Plan for Housing published in July 2016 states that a strategy for the private rental sector will be published in Q4 2016. At present we have the result of an entirely ineffective compromise reached by the government at the end of 2015 where rents are to be reviewed every two years.

Undue influence of multinational property interests

Apart from the philosophical orientation mentioned above, one key reason for no significant action to regulate rents has been the undue influence of both multinational and Irish property interests. 

Freedom of Information requests reveal that these have carried out intensive lobbying of the government in recent years.  As an example, the US firm Kennedy Wilson mentioned above, which rents about 1,500 units in Dublin wrote to the Department of Finance in late 2015 strongly advising against rent regulation. 

This firm argued that such measures would  act as a “huge disincentive” and would result in “adverse unintended consequences” for investors. The intervention by this international landlord and Irish property interests played a key role in the compromise reached by the government in late 2015. Surely the needs of almost 700,000 struggling tenants should receive more attention that these property interests?

Seven economic reasons why rent regulation should be introduced

There are a number of economic reasons as to why “rent regulation” should be introduced in Ireland:

1. The private rented sector is an “imperfect” or “monopolistic-type” market where there are large numbers of tenants seeking accommodation and a much smaller number of landlords offering accommodation. In reality, tenants have virtually no influence over rents and landlords can dictate what the rents will be. Government regulation is now  widely accepted as essential in such monopolistic-type markets. 

2. While failing to regulate rents the government has provided €5.6 billion over the last sixteen years in rent supplement for landlords. This has, in effect, maintained a “floor” on the rental market and a significant bonus to landlords. 

3.  High rents (as well as high house prices) are bad for the economy. Large sums of money have to be expended on renting or purchase which could otherwise contribute to employment-generating activities. 

4.  High rents (as well as high house prices)  result in pressure for wage increases, thus leading to a loss of competitiveness. 

5.  Recent rent increases have been seriously out of line with indicators such as the Consumer Price Index and the cost of building.  This divergence cannot be justified for an economic necessity such as housing.

6. “Affordable housing” is a key objective of government policy.  Yet, most private sector rent  increases are now unaffordable.  They resulting in many evictions and are in conflict with government policy.

7. High house prices and rents act as a deterrent to skilled workers wishing to return to Ireland and to the executives of  foreign companies  considering Ireland as a location. 

There are also a range of social, equity and ethical reasons why house prices and rents should not be allowed to escalate unreasonably. Housing must surely return to being a “home” rather than another “commodity”. In forging its new rental strategy the government has a golden opportunity to provide rent certainty to both tenants and landlords. Rent regulation is one key component in resolving our present housing crisis.

P. J.  Drudy is Emeritus Professor of Economics at Trinity College, Dublin and is a member of the TASC Economists Network.

1 comment:

soldiersofdestinydotorg said...

All true but the fools who we elect to govern us are not listening..