Assessing the impact of 2% rent caps

The Week in Housing 19/11/21

This week saw the publication of the Residential Tenancies (Amendment) (No. 2) Bill 2021, introducing two significant new changes to the PRS. First, the introduction of indefinite tenancies by making a ‘Part 4’ tenancy of unlimited duration, rather than expiring at the end of a six-year term. The other change is that the RPZ rent caps (which cover 74% of tenancies), will now limit rent increases to a maximum of 2% per annum or the HCPI, whichever is lower.

The first change, first mooted in Rebuilding Ireland some 5 years ago, relates to the all important issue of security of tenure. It represents a welcome step in the right direction in terms of treating PRS housing as homes. Nevertheless, it does not deal with the major issues in relation to security of tenure. We don’t have great data on security in the PRS in general, but by pulling together a few sources we can get an idea where the real issue is.

First, the homelessness data. Gambi et al. (2018) provide a comprehensive analysis of families in the Dublin region who entered homelessness in 2016 and 2017. The majority (68%) of such families identified private rental accommodation as their last stable accommodation, but, as the table below suggests, the majority of reasons for loss of last stable accommodation will not be addressed by this new Act.

Most commonly-cited reasons for leaving last stable accommodation 2016-2017. Source: Gambi et al., 2018

Moreover, from the Household Budget Survey, we know that more than 55% of households within the private rental sector have been resident in their current home for less than three years. This contrasts with just under 15% across all households. This suggests that the majority of tenancies are shorter than 6 years. Similarly, research from the Housing Agency suggested that average tenancies durations around 3 years.

Duration of residence by tenure, 2015. Source: Household Budget Survey, 2015

The changes to the RPZ rent regulations are much more significant in my view. When enacted, Ireland will have some of the strongest rent regulations in Europe. But what will their impact be? There are a few things to consider here. First of all, and perhaps most importantly, it remains to be seen what level of compliance will be achieved. We know from research from the ESRI, that more than 40% of tenancies within RPZs in the period their research covered received rent increases above the 4% cap which applied at the time. The Minister and the RTB CEO recently acknowledged the compliance issue, which I wrote about here. Without compliance, the impact will of course be limited.

Second, what will the impact on supply be? New tenancies (properties which have not been on the rental market within the previous 2 years) can set rents at market rates, i.e. whatever a willing tenant will pay. However, once a new tenancy is established, subsequent rent reviews are capped. In my view, this is unlikely to dampen supply from institutional investors as current yields in Dublin and elsewhere are attractive when compared with other locations in Europe, and I think 2% increase per annum still gives plenty of scope for rental income growth over time.

For new small-scale landlords, it also seems unlikely that the legislation would make a huge difference, especially for those who are not borrowing significant amounts to purchase a property. They can still set the rent at market rates. Moreover, this week’s CSO data (which I’ll come back to in a minute), shows us that house prices are increasing rapidly. Therefore, even if rents can’t increase at all, landlords can enjoy more than 10% per annum growth on the value of their asset, which is very attractive when compared to some alternative investments.

The cohort most likely to be effected are existing small-scale landlords, especially those that comply with the legislation. If rental increases are limited, and given the huge amount of new regulation in the sector in recent years, they may decide to sell up and realize the large capital gains of the last few years. There is already a lot of commentary from industry about a small-scale landlord ‘exodus’ already and a concern that the new rules would add to this (see the Simon Community’s Locked Out report this week which raises more concerns re supply).

There may be some more clues to what’s going on in the CSO Property Price Register data. A new release this week showed that prices are up by 12.4% nationally in the year to September, and 11.5% in Dublin. These is exactly what was anticipated during the pandemic, as it became clear that supply would be severely constrained, household savings had increased rapidly, and households were more likely to value ‘home’ as a consequence of living through the pandemic and various lockdowns.

The CSO also provides data on buyer type. I discussed the short comings of this data last week, but it is still useful to get a picture of what is happening in the PRS. In the past year (to September), there were 45,417 residential purchases made by households. 32.2% (14,611) of these were first time buyers and 53.7% were former owner occupiers. The remaining 14.1% (6,395) were by non-occupiers, which ought to be predominantly made up of landlords (although it also includes holiday home purchasers, for example).

This means that in the year to September, residential purchases by non-occupier households were equal to 43.7% of first time buyer purchases. Looking at the issue this way, can give us a picture of how the housing system is developing, especially if we look at historical data to put it in perspective. As the table below shows, in 2014, we see that household non-occupier purchases represented 104 percent of FTB purchases, while in 2017 this figure was 81 percent. Moreover, between 2014 and 2018 household non-occupiers purchases around 11,000 houses and apartments per annum, as opposed to the much smaller figure of 6,395 for last year.

This suggests (notwithstanding the limits of the data) that PRS household investors have indeed fallen in terms of their proportional role in property investment and in absolute terms. Moreover, new CSO data released just this week (and which I hope to look at in detail next week), finds that the number of household landlords has fallen from just over 170,000 in 2017 to 156,555 in 2021, a rather steep decline. Although bear in mind we don’t have a full picture of precisely whey this decline is occurring.

Residential property purchases 2014-2018. Source: CSO.

The discussion so far relates to household purchasers and does not cover institutional landlords. The full 2021 data on this is not available, but we can look at the period until 2020, depicted in the table below. As can be seen, institutional investment has increased in recent years. There is a slight dip in 2020 but this is likely related to Covid-19. This would suggest that institutional landlord investment has not been dampened by the flurry of new regulations in the PRS, including the RPZs.

Institutional residential property purchases, based on the PPR data for three NACE categories of non-household purchasers: construction, finance and real estate. This captures institutional investment while excluding Local Authorities and AHBs. Source: CSO

So, what does all this tell us? Well, we still don’t have accurate data on small-scale landlord investment as the data for household non-occupiers is only a proxy and we don’t know how many such landlords sell up each year. But broadly, the picture looks like the transformation of the Irish PRS since 2015/2016 has indeed dampened investment from small-scale landlords, but has not had the same effect on institutional landlords. In other words, it is more or less in line with the anecdotal evidence.

What does this mean for the impact of the new RPZ measures? The measures cover all existing tenancies. So the possible negative effect would be that while rent inflation is moderated by the new rules, rents for new tenancies increase due to the reduced levels of supply from the small-scale landlord sector.  It is important to highlight that we just don’t have enough evidence to see that this is the likely outcome with any certainty. And it is important to bear in mind that in a sense new properties are competing with existing properties – so rent prices in the former may not end up being substantially higher than the latter as this might make them unattractive to tenants.

If it is the case that the new RPZ measures lead to somewhat higher prices in the new properties segment of the PRS, however, I would still support them as I think improving affordability for the approximately 300,000 current tenancies would be worth the trade-off.

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Events

As mentioned last week, I am organising a webinar about institutional landlords on the 8th of December. We have very limited evidence on the impact of institutions on the Irish PRS, so I thought it would be really interesting to bring together some of the leading researchers from North America to share their insights. Register here. 

The challenges facing young people in accessing affordable housing is one of the key issues for the EU, a topic which will be addressed at this Future of Europe Housing Event taking place on the 9th December and organised by Centre for Housing Law, Rights and Policy NUI Galway. More information here and register here. On December 2nd the Evict project brings us another interesting webinar, this time on the right to housing in Palestine.

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What I’m reading

In a week were climate change is front and centre, Joseph Kilroy of the Chartered Institute of Building looks at the impact of Ireland’s Climate Action Plan on the built environment. Another interesting piece from Ian Mulhern looking at the debate within economics about the drivers of house prices, and the theoretical issues at stake. And finally, the latest issue of Urban Studies out, featuring an article by Valesca Lima on the radical right to housing. And lastly, the Dublin Regional Homeless Executive’s 2020 report was published this week.