The impact of RPZs
Last week I was delighted to take part in the launch of the recent UK Centre for Collaborative Housing Evidence report on rent control. The report, which I discussed here, represents an important contribution to the international literature and is particularly helpful in adding nuance to how we interpret evidence around rent regulation. In preparing for that event, I had the chance to go back to a recent piece of Irish research on the RPZs published last month.
Rental Inflation and Stabilisation Polices, written by Coffey et al. for the ESRI research series, looks at the impact of the RPZ measures in Ireland since 2016. The report is interesting as it expands and updates previous ESRI analysis of the RPZs, but also sets the analysis in the context of a review of the international evidence and international policy developments. In this regard, I think it is quite likely that this report will inform the thinking of policy makers here in Ireland, as it is now the most comprehensive piece of research on the topic we have in Ireland.
The report includes a discussion of recently introduced rent regulation in a number of European countries, including Scotland and Germany. These examples have much in common with the Irish case, in that they:
- are triggered by something, e.g average rent increases over a specific time period;
- are geographically and time limited;
- include some exemptions to try mitigate supply impact, such as exempting new properties or refurbs.
This is interesting as it suggests we may be in a new era of ‘local, time bound’ rent regulation, as opposed to long-term, nationwide versions of the policy.
The proliferation of rent regulation in Europe and some US states is a testament to the attraction of this policy instrument. As I have noted in previous issues of The Week in Housing, one of the attractions of rent regulations is that there are not many alternatives ways to deal with rent inflation that policy makers, and indeed politicians, can turn to.
Increasing supply is obviously the main alternative to rent regulation, and, depending on the context, this can be an important response. But even if we accept that increased supply will stabilise or reduce prices, supply-side solutions take time. If rents are rising fast, this may be because of a substantial supply/demand imbalance. If this imbalance is substantial, it follows that it will require a significant increase in supply to address it. As property development is generally slow, it may take years before increased supply makes a dent in terms of affordability.
Moreover, as we are seeing right now in Ireland, over the medium term, housing markets are vulnerable to exogenous shocks. We are currently confronting: a large increase in construction costs; potentially significant increases in Eurozone interest rates; and the arrival of Ukrainian refugees. In other words, the supply-side approach can very easily be upturned or set back by unexpected events or developments.
From a political point of view, supply-side solutions are also vague. It is typically not possible to say at what point in the future a given increase in supply will materialise or what its impact on rent prices will be. Essentially, it requires politicians to say, ‘we will increase supply and at some unspecified point in the future prices will stabilise by some unspecific amount’. Rent regulation, at least at the level of optics, is more direct and more immediate. (To be clear, I am not suggesting it is some kind of either/or nor am I arguing that supply is not crucial).
Another way of addressing affordability is rent subsidies, such as HAP. Although subsidies are crucial given that large numbers of households cannot afford market housing and also cannot access social housing, they are nevertheless beset by shortcomings. Rent subsidies are expensive and spending on them has a tendency to get out of control – see the experience of Housing Benefit in the UK and HAP here in Ireland. They add to demand and thus can potentially inflate prices, especially where there is an existing supply/demand imbalance (precisely the situation in which you are likely to need them). And, finally, rent subsidy recipients are subject to widespread discrimination, which is well documented in a number of countries, including Ireland.
For these reasons, rent controls are likely to become an increasingly common response internationally to rent inflation. Moreover, once in place, they will be very difficult to remove. All of this underlines the importance of understanding the impact of rent controls.
Looking at the international evidence on the impact of rent regulation, the ESRI have this to say:
“There is a clear economic rationale for the use of rent controls internationally in settings where the presence of market failures, information asymmetries or excess demand (coupled with inelastic supply) are prevalent”.
They also echo the argument, often found in reviews of international evidence on rent regulation, that while existing tenants benefit from rent controls, they can have “significant supply-side effects, with studies demonstrating lower maintenance investment and market exits of rental properties. This can serve as a cost to potential new tenants”.
As noted, the research updates a previous study. The 2019 study found that the RPZ measures moderated rent price growth by between 2 and 3 percentage points within RPZ areas compared to non-RPZ areas. It also found that more than 40% of tenancies within RPZs during the period covered by the research had received a rent increase above 4% (although it cannot be inferred from this that all, or even most, of these cases are down to non-compliance).
This latest research uses a variety of the different approaches to assess the impact of the RPZs, including econometric testing. The main findings are:
· RPZs reduce the level of rent inflation;
· The areas designated as RPZs since 2019 have experienced a greater reduction than those originally designated (in 2017);
· While it appears that rent inflation has fallen in RPZ areas, not all of this decline can necessarily be attributed to the RPZ measures, so a degree of caution is warranted;
· There are still a considerable number of tenancies experiencing increases of more than 4%. The research usefully looks at the number of RPZ exemptions which are actually registered with the RTB, and finds there are very few of these. The implication is that (a) there is likely a good deal of non-compliance out there re the RPZs; and (b) there is also non-compliance re registering exemptions, such as in the case of new builds. Nevertheless, it is important to note that the authors are careful to issue a number of health warnings as the nature of the data means it is not possible to make any robust statements re the level of non-compliance one way or the other.
The above notwithstanding, the main finding, that RPZs are effective in moderating rent inflation, won’t come as much comfort to tenants. Average annual rent increases for the 3 years before RPZs were just under 10%. In the three subsequent years, average annual inflation was around 6.5%. So while there has been moderation, we are still seeing some very high figures. Moreover, as the latest Daft.ie report indicates, over the past year we are back once again to annual rent inflation above 10%.
A couple of final things to keep in mind are worth noting here. First, as the authors note, rent regulation impacts a wide variety of issues but, mainly down to the available data, this research looks at just one of those. Second, the RPZ legislation has of course subsequently been updated and the rent caps are now pegged to the HCPI or 2% per annum, whichever is the lower. The research thus relates to the previous regime. Nevertheless, it is great to finally get a comprehensive, empirically grounded analysis of the impact of the RPZ.
I’ll be taking a break from The Week in Housing for the next couple of weeks as I try to wade through an ocean of assignments that need to be graded!
Events
On May 19th TASC will launch their latest report on inequality in Ireland. At the end of the month the #SimonTalks seminar series will look at older people’s housing needs. Lastly, on the 2nd of June the 2022 Simon Brooke seminar will look at domestic violence and housing.
What I’m reading
The latest #Housing2030 podcast looks at financialization, monetary policy and housing - it’s well worth a listen. My colleagues Clíodhna Bairéad and Michelle Norris have a new article on typologies of emergency accommodation usage in Dublin. Social Justice Ireland have a great new piece looking at recent released HAP data from the CSO.