In defence of cost rents

The Week in Housing 11/03/22

As cost rental takes shape here in Ireland, it’s interesting to look at its reception and the nature of criticism of the sector. I recall that when cost rental was first mooted (at least when I first became aware of the push for cost rental in Ireland, back around 2014), one of the common critiques was that it enabled the involvement of private finance in non-market housing. This was a left wing critique which was more or less based on a blanket rejection of private finance. This critique seems to have gone out of fashion, or at least I haven’t heard much of it lately.

One critique we may have expected to emerge, but which does not appear to have, is the classic neoliberal one: non-market based provision of services is inefficient, leads to excessive levels of public debt, and crowds out private investment. If cost rental had have been established back in the 2000s, I have no doubt these critiques would have rang out loud and clear. Indeed, it is a testament to the waning of the influence of neoliberalism on housing policy (as I argued in detail here) that no one appears to be arguing that private housing markets are more efficient, and virtually all commentators appear to recognize the need for a large non-market segment.

Instead, the criticism that seems to have gained most traction focuses on rent prices in the cost rental sector. Just last week, Darragh O’Brien tweeted about the launch of a new Tuath Housing Cost Rental scheme in City West, with rents between €1,200 and €1,300. One of the very first replies was ‘Renting an apartment should not cost more than a mortgage on a house! You are deluded if you think low income people can afford this.’ This argument plays into a wider and very well established argument that Government ‘affordable housing’ schemes are anything but affordable.

This line of argument is, in my view, both incorrect and dangerous. It is dangerous because widespread public and cross-party support is vital to the success of cost rental (a point I return to below). It is incorrect for two main reasons. First, attacking year one rent levels is a red herring and represents an overly simplistic understanding of housing affordability. Second, it misses the point of cost rental entirely.

Let’s start with the first of these. To begin with, rents of €1,200 -€1,300 per month are markedly more affordable than private rents and are affordable for many households. I had a quick look on Daft.ie at apartments in City West, the location of the new cost rental development mentioned above, and there are currently two two-bed apartments available, one for €1,625 and another for €1,785. If you move from private rental in City West into cost rental, your rent will decline by at least 26%. That’s a pretty a big difference.

Much more importantly, focusing on headline, year one rents is far too simplistic. One of the strengths of the cost rent model is that it provides stability with regard to rental inflation over time. My understanding is that annual rent increases within cost rental will be 2% or less, depending on the HCPI. PRS rents are now subject to the same restrictions, although there are exemptions. Unlike the PRS, however, AHB cost rental providers are very likely to actually comply with rent increase legislation. Despite rent increases in the PRS being regulated since 2016, rental inflation has moved between around 5% and 10% since 2014/2015. Rapid rent increase are not limited to Ireland and appear to be developing into a long term structural trend in the PRS internationally, so they are likely to stick around.  As cost rents grow much more slowly, over time their affordability when compared to private rents is dramatically enhanced.

If we take for example the new Tuath units in City West mentioned above, assuming rent inflation for cost rental is around 2% per year, in ten years a €1,300 per month two-bed will have a rent of around €1,581. If we take the cheaper of the two PRS units I found in the same area on Daft.ie, over the same period the rent will increase from €1625 to €2,906. So the cost rental unit will be 45% cheaper at that point than the PRS unit. This is a very positive result from an affordability point of view.

In short, if you are going to critique rents in the cost rental sector, please focus on rents at year 5 , year 10, year 15 and even year 30. This is a much more meaningful contribution to public discussion and understanding.

It is also important to emphasize that when we compare cost rental housing with PRS we are not comparing like for like. Cost rental tenants get rent certainty, security of tenure for life, high quality property management and maintenance, and brand new apartments that meet the highest standards. PRS housing in contrast, as is well known, is plagued by insecurity, poor standards, informality, and non-compliance with regulations.

Moving on to the second issue, those who criticize headline, year-one rents in cost rental are missing the point. The objective of cost rental is not to provide below-cost housing to those on the lowest incomes.

So what is the point of cost rental housing? The premise of the model is that private housing markets, based on a profit-driven speculative development model, are characterized by a number of shortcomings. First, supply can be erratic, highly cyclical, and slow to respond to shifts in demand. Second, the speculative model, with its relatively high cost of finance and profit margins, can be unduly expensive. The objective of cost rental is to equip Government with an instrument through which to shape long term supply of housing, and to do so in a way which ensures housing is responsive to demand/need and which is not subject to boom/bust price cycles, profiteering etc.

Take a look at the below graph that compares social housing output in Ireland and Austria. What is most notable is the stability of the Austrian cost rental system over time, versus the highly cyclical nature of Irish social housing. We can see for example how Austria has been able to maintain output right through the worst years of the GFC.

Annual social housing output 1994-2014. Source: Norris and Byrne, 2018

The consequence of such a model is a large, moderately priced non-market rental sector and overall adequate levels of supply, both of which support overall housing affordability at the level of the housing system as a whole. Here’s another graph, this one showing house prices in Ireland and Austria. Again we see the Austrian system is highly stable right throughout the period, while Irish prices are all over the place.

Annual house prices increases, 2000-2014. Source: Norris and Byrne, 2018

From this perspective, there is no contradiction between the fact that there may new cost rental apartments in Vienna that cost as much as €1,000 per month in year one (which is viewed as very expensive over there) and the overall objective of housing affordability at the level of the housing system as a whole.

To demand that cost rental housing provide below cost rents that are affordable to those on the lowest incomes is to completely miss the point. Such a model would be difficult to sustain financially because it would require a lot of support from the state, support which would likely evaporate during recessionary or fiscally constrained periods. Moreover, cost rental tenants are eligible for HAP and we already have social housing, which is designed precisely to deliver below cost housing to those on the lowest incomes.

To return to the main argument, cost rental housing should not be evaluated on the basis of year one rents. It should be evaluated on the extent to which it facilitates the provision of housing outside speculative market models and cycles, thus ensuring responsiveness to demand and enhanced affordability of the housing system as a whole over the long run.

Focusing on scary numbers like €1,400 per month may capture the attention, but it confuses the debate. In my view, if we want to (eventually) get to a situation in which upwards of 30% of households in the Dublin area live in non-market housing, we will need to accept the rent setting model within the cost rental sector.

This is a really important issue because we know from other countries that a cross-party political consensus and widespread public support are crucial for the long term success of cost rental. Indeed, in both Denmark and Austria the cost rental system is viewed as a source of national pride. Christian Democrat and Social Democrat parties, as well as trade unions and employers organizations, have all been strong supporters for many decades.

Public support for heavily subsidized housing is difficult to maintain long term because obviously it means one section of the population is heavily subsiding the housing of another sector. This would be fine if Ireland was a very left wing country and was likely to remain a very left wing country in perpetuity. But we’re not, so we need to fight hard for public buy in to the cost rental system.

It’s very easy to decry ‘high rents’ in the first cost rental initiatives, but we run the risk of discrediting the sector as a whole or at least sowing doubt and confusion in the public’s mind. This is especially important because there is already a widespread narrative that all Government affordable housing measures are a scam and are not really affordable. We really don’t want cost rental lumped within initiatives like shared equity etc.

None of the above should mean that the cost rental sector is beyond criticism. The sector should be criticised, and in particular the role of private developers and finance should certainly be subject to public debate and scrutiny. But overly-politicising year one rents with denouncements of unaffordability, in my view, does not serve public debate and risks discrediting the sector.

I’ll be taking a break from The Week in Housing for the next couple of weeks for St. Patrick’s day and our mid-term here in UCD - back at the beginning of April.

Events

A reminder that on March 22nd the Renters’ Voice group is organising a DIY Renter’s Manifesto workshop. On March 15th FEANTSA are holding an expert panel on alternative ways to finance the social climate fund. A #SimonTalks seminar on responding to women’s experiences of homelessness from late February is now available to watch online. The Housing Commission is organising a conference on the right to housing on May 10th and 11th, I’ll provide links to more info on this event as it becomes available.

What I’m reading

A very interesting blog on the right to housing in the Scottish context from Adriana Mihaela Soaita of the UK Centre for Collaborative Housing Evidence was published last week. On the same theme, the Global Platform for the Right to the city released this report on the discrimination and the right to the city. More new evidence on rent regulation was published too; this working paper looks at the 2020 Catalan rent regulations and finds the by reduced rents by 6% but did not reduce supply. Finally, for the history buffs this new book by Joseph Brady looks at the transformation of Dublin between 1970 and 1990.