PRS research round up: institutional rents and affordability in Europe

The Week in Housing 29/03/24

I’d like to begin today’s Newsletter by congratulating the three winners of the annual Clúid Housing and Social Justice competition. This is a competition I run with Clúid every year for students on my Social Justice and the City undergrad module. The students design a proposal for housing that responds to the Irish housing crisis and is based on principles of social justice. This year, one of the proposals developed an innovative youth housing model, while the other two found innovative ways to apply Community Land Trusts to Ireland. You can see more details and read the winning entries here. Huge thank you to the judges of the competition: Fiona Dunking and Andrew Daly from Clúid, and especially Mary Osakwe, Adina Bocotan and Michelle McGoldrick, who are part of Clúid’s resident advisory group (and also met the students during the class to share their expertise on social housing).

This week we’re looking at some new PRS research, both in Ireland and internationally, starting off with a Central Bank Research Technical Paper by Barra McCarthy. The paper makes a very welcome addition to the limited body of evidence on the impact of institutional landlords (henceforth ILs), and looks mainly at the impact of their purchase of existing dwellings on rents. Rather than focusing on new supply, which may reduce average rents (at least according to some of the recent economics research), the paper focuses on what difference it makes if an IL purchases an existing residential unit, compared to properties which are not sold to ILs.

Looking at 2019, the paper finds that ILs owned 12,643 units, 9,862 of which were purchased as existing properties. That is a very high figure, which suggests caution in terms of how much we should think of ILs as supplying new housing, a point also made in this recent piece by Pierce Daly. Having said that, I expect that if we looked at the figures for today, a much larger proportion would be new construction, as ILs have become more focused on new construction over time.

The research also finds some degree of market concentration (again similar to Daly’s research):

[I]nstitutional landlords collectively accounted for more than 10% of tenancies in 11 local electoral areas, and in two of these electoral areas they held more than 20%. The [area] with the highest share of new tenancies agreed with institutional investors is Glencullen-Sandyford Local Electoral Area, with 35% [of tenancies held by] institutional investors.

The research only compares ‘like for like’ properties, i.e. similar size, year of construction, energy rating and location.

The main finding is that ILs increased monthly rents by 4.1 percentage points more than other landlords following purchase.

The report argues that there a number of reasons why this might be the case:

·       ILs have greater market scale and bargaining power

·       ILs offer better services (which involve higher costs)

·       ILs attract better off tenants, who bid up prices

·       ILs have a greater focus on the ‘bottom line’ or profitability, when compared to small landlords who might want a ‘quiet life’ and a good tenant, and be more interested in capital gains than rental income (a point I discussed a few weeks back), and partially supported by this US research

The research also looks at how ILs impact the local rental market around their dwellings, and finds that landlords within 100 metres of an institutional investor raise monthly rents by 2.3 percentage points more than landlords who are not.

All in all, while the difference is not huge, it broadly supports the view that ILs’ focus on a higher end product and profitability tends to push rents up in their own dwellings and in their immediate area. A key point arising from this is that ‘new investment’ by ILs is not just about supply, and that the price effects go beyond ‘supply effects’. In other words, the effect of investment is not just ‘more supply’; landlord typologies and associated business models matter.

Interestingly, the paper is broadly in line with other research produced by public bodies in Ireland, including this Department of Finance paper, which didn’t reach any strong conclusions but worried about market concentration, and this research by the ESRI, which also suggests ILs tend to raise rents more than other landlords.

Issues of affordability also feature in a fantastic new comparative report looking at housing affordability in Europe. It uses a variety of data, including EU SILC, to look at how tenure patterns and housing affordability is changing in Europe, focusing on the period between the mid-2000s and 2018. Their findings very much support two topics that are much discussed in Ireland and further a field: homeownership is declining and private renters are increasingly disadvantaged. Interestingly, though, they don’t find that housing affordability is worsening in general, and (brace yourself) Ireland comes out as one of the most affordable housing systems in Europe. There’s way too much in the report to cover here, so I’ll stick with some of the points of most interest to Irish readers.

First up, focusing on younger households (under 60) the study finds that 23 of the 28 European countries examined witnessed a decline in homeownership and a growth in private renting between 2005/2007 and 2016/2018 (check out the Figure on page 16). France, Malta, Czechia, Slovakia and Poland are the only countries to experience an increase in homeownership, and in most cases this is modest. What is also notable is that there does not appear to be any discernible pattern in terms of the level of decline experienced by different types of housing regime.

Anglo-phone countries show a consistent pattern, with both the UK and Ireland seeing a decline in homeownership of more than 10% (the sharpest declines except for Slovenia). Southern European countries show a clear tendency of decline, but only Spain has witnessed a very significant fall (almost 10%), with Italy falling by around 5% and Portugal even smaller. The Social Democratic countries exhibit a similar tendency, with one country, Denmark, showing a large decline of almost 10%, while in both Sweden and Finland homeownership fell by less than 5%. The continental countries were most stable, with Germany and Austria showing declines of a little less than 5%, Belgium was very stable, and France showing a modest increase. In Central and Eastern Europe, Slovenia witnessed a significant decline of homeownership (more than 10%), as did Estonia (close to 10%), but Poland saw a dramatic increase, and the other countries remained relatively stable, although almost all countries experienced a decline and for Hungary and Bulgaria this was close to 5%.

Stepping back, the most notable pattern, from both the European data and more broadly, appears to be that countries such as Denmark, Ireland, UK and Spain all experienced significant declines in homeownership, and these are all countries that experienced financialized housing market bubbles in the early and mid-2000s (the US fits this pattern too).

As a sidenote, the authors note there are some issues with using SILC data to look at tenure change. There are a couple of very good technical paragraphs on how tenure is captured in SILC of interest to housing researchers. I have pasted these at the very end of this post.

Interestingly, the authors also find that in many countries homeownership has also become more concentrated in terms of better off households (also evident in this great recent comparison between Netherlands and Australia).

The report also looks at young people’s independent living, and finds that young people move out much later in the anglo-phone countries, but especially in Southern and Central and Eastern Europe. Interestingly, while the average age young people move out has grown over time, the change has been reasonably modest.

In terms of affordability, the report uses the ‘housing cost overburden’ measure, which is households paying more than 40% of net income on housing costs (including property taxes for owners). In almost all countries, the rate of overburden is higher among renters than owners, and in many countries there is a big difference. Germany is one of the few western European countries where this is not the case. Note that the analysis here compares renters paying market rates and mortgaged homeowners (and so excludes outright owners, who have no or little housing costs, and social housing tenants).

What is really remarkable is that for both mortgaged owners and private renters, Ireland comes out with a very low rate of housing cost overburden, especially for owners. In fact, there are few countries who come out better. Notably, the UK, which has broadly similar housing system to Ireland, and a very similar discourse of ‘housing crisis’, is one of the countries that comes out the worst. Ireland also comes out as having one of the lowest rates of ‘severe housing deprivation’ (poor quality/overcrowded housing). This is a bit of a head scratcher to be honest, and something I hope to look into. If you have any thoughts on why this might be the case please use the comment function below.

In terms of the trend over time, they do not find that housing affordability has worsened significantly, although they do find that ‘the position of market-rate renters has deteriorated vis-à-vis mortgaged homeowners in a large majority of nations across Europe between 2010 and 2018, even after controlling for a variety of compositional variables. That is, tenure differences appear to have become more important over time in terms of explaining the incidence of housing cost overburden’. In explaining why affordability has not deteriorated, in spite of housing cost increases in many countries, the report suggests that ‘house price rises are being “offset” through reductions in ownership and delayed independence.

News & events

The Simon Community are having an event in May looking at hidden homelessness. The House Building Summit will take place in Mid-April. As always, if you are interested in doing PhD research on housing or urban political economy, please get in touch. Also, our masters programmes at Social Policy, Social Work and Social Justice (UCD) are open for applications, check out the Equality Studies programme here and the Masters in Public Policy here.

What I’m reading

Plenty of interesting new stuff out this week. The latest Daft report shows house prices have risen by 5.8% and the number of properties available to purchase is down 24%. Kathleen Stokes and Michelle Connolly have just published a report, funded via the Housing Agency’s Research Support Programme, on using vacant ‘above the shop’ units for residential. You can read the report here, and a shorter RTE Brainstorm piece by the authors here. This new report from the Joseph Rowntree Foundation explores the possibility (in UK context) of purchasing housing from the secondary market (i.e. not new builds) for use as social and affordable housing, not dissimilar to our own Tenant in Situ scheme. I’m particular interested in this because I have the feeling that over the next years debate will increasingly turn to the distribution of housing rather than supply. On that very subject, I found this piece in the Guardian essentially arguing for the abolition of landlords fascinating. Some of the arguments are fairly dodgy, but I see it as yet another reflection of how the debate around the PRS and tenant politics is shaping up internationally. Finally, on another topic we’ll being hearing plenty about, this new report from the US looks at a ‘Green new deal for housing’.

Extended quote on tenures in EU SILC (from page 13 of Housing and Poverty in Europe)

“A central challenge when working with SILC is that the housing tenure variable – an important variable for any study of housing – is not well-measured in that survey, which frustrates analyses within countries that examine differences by tenure and, between countries, by measures that focus on the balance between tenures (on this question, see also Dewilde, 2015; Stephens, 2016). Amongst tenants, SILC does not distinguish between private renting and social renting, but rather between renting at ‘prevailing or market rate’ and renting ‘at a reduced rate (lower price than market price’ (Eurostat, 2017).

In SILC, tenants who are renting ‘at a reduced rate’ include those ‘(a) renting social housing, (b) renting at a reduced rate from an employer and (c) those in accommodation where the actual rent is fixed by law’ (Eurostat, 2017: 172). It thus captures situations where rental costs are suppressed through a variety of mechanisms, in both the public and private rental sectors. Tenants who rent ‘at prevailing or market rate’ include those where such supply-side mechanisms do not apply and includes circumstances where rental costs are paid for (in whole or part) through housing allowances. Thus, demand side policies to support housing affordability, which may also have the effect of reducing incurred housing costs, do not influence the categorization of whether a household rents at a market or a reduced rate.

Moreover, and somewhat counter-intuitively, in situations where there is no market rental category – where all rents are restricted in some way and which might be categorised in Kemeny’s terms as a unitary rental system – households are categorised as paying the ‘prevailing’ rent and thus categorised in the ‘prevailing or market rent’ category. The consequence is that countries such as the Netherlands and Sweden, which have significant public or social housing stock and/or regulation of the for-profit sector, ‘almost all rental housing is categorised as being at “market rent”’ (Stephens, 2016: 26). It has also been suggested that the proportion of housing identified as being non-market in SILC is lower in some countries than is indicated by national sources (Stephens et al., 2010).”