The truth about RPZs: all the evidence in one place
The Week in Housing bonus post
I’m releasing this week’s post early because I wanted to write about RPZ reform while it’s in the newscycle. The public debate so far has been largely detached from the evidence. I really hope that journalists in particular will use the below as a resource, because it summarises all the evidence we have on RPZs, clarifies what the evidence does and does not tell us, debunks some of the main arguments in the debate, and summarises the main potential avenues for RPZ reform and their pros and cons. I believe it is a balanced piece. I was also on the Irish Times Inside Politics podcast discussing these issues in great detail. The below piece is longer than usual as I feel it is important to lay out all the arguments and evidence clearly. As you may imagine, pieces like the below take a lot of work and I would be very grateful if you would consider becoming a paid subscriber. Thanks once again to all the existing paid subscribers who make pieces like the below possible.
The debate about RPZs, whether they should be abolished, and what will replace them is well and truly underway. Coming into the recent election, all three left opposition parties committed in their manifestos to abolishing RPZs and replacing them with a reference rent system. Meanwhile, Fine Gael committed to maintaining them while Fianna Fáil stated they would ‘continue to evaluate’ them but didn’t raise any issues with them. Then, last week, Micháel Martin comes out and says maybe we should consider abolishing the RPZs and replacing them with reference rents. Fianna Fáil pulling a trick which has worked well for them so far: implementing the opposition’s housing policies. The left opposition parties then decry Martin’s statement as incredibly cruel and symbolizing everything that is wrong with the Government’s approach to housing, with no one mentioning that replacing RPZs with reference rents is in fact the opposition parties’ stated preference!
Leaving the political shenanigans aside, the debate has already sunk into a quagmire of misinformation and half-truths. Industry voices, including the IPOA and others, argue that the RPZs haven’t worked and that unleashing supply by deregulating rents will solve both the affordability and availability of PRS housing. So far, I haven’t seen a single mention of the two pieces of research we have, published at the end of last year, which allow us to assess the impact of the RPZs. Moreover, little consideration has been given to the contradictions within the anti-rent regulation position (at least in its simplistic form). In what follows I’ll try to break down the key issues in this debate in as clear and as evidence-based fashion as I can. If I’ve missed anything, please let me know.
Are the RPZs working?
Three objectives were identified for RPZs at the time of their introduction:
1) Affordability. This excellent research from the ESRI answers the affordability question fairly definitively. Looking at the period 2022-2024, during which the 2% caps were in place, the research finds national average property level growth was 2.6% per annum, but it was much lower in RPZs at around 1.5% per annum. This is despite the fact that RPZs include the places were the biggest imbalance between supply and demand occur. Similarly, properties within RPZs saw lower rent increases between tenancies, and tenants were much less likely to see large jumps in rent (above 15%). Note, this data relates to property-level data, not averages, and is therefore much more accurate than making inferences from the ESRI/RTB rent index. The research, moreover, is consistent with the two previous pieces of research which assessed the impact of the RPZs, both of which found that they had enhanced affordability. In short, RPZs work in relation to their stated objective of limiting rent increases.
2) Not unduly undermining supply: when the RPZs were implemented, a core argument for their design was the importance of maintaining investment in the PRS. What does the data tell us about their impact? Overall, the PRS is growing got shrinking. The best available evidence is the Census, which shows a 6% growth between 2016 and 2022, covering much of the period RPZs have been in place. The recent RTB registration data shows a net increase in registered tenancies, with 18,000 added in the past year. Moreover, the RTB data shows this growth in tenancies is concentrated in the RPZs. Even the RTB Director (they generally stay out of policy debates) pointed out that the prevailing narrative does not fit the data. The argument that rent control is causing the rental sector to shrink, then, is quite simply not supported by any evidence.
However, the story is more complicated than that. Even if the sector is growing, some landlords could still be leaving due to the RPZs (i.e. the exits are offset by more entries). Another recent piece of excellent research analyses the specific impact of RPZs on landlord exits from the PRS. Using a variety of data sources, the authors show that RPZs have increased exits from the sector and increased the number of properties on the sales markets, i.e. an increased number of landlords selling up. However, there are some important caveats. First of all, when the 4% rent caps were in place there was no effect. For the period in which 2% caps were in place, they estimate RPZs resulted in approximately 10% fewer rental listings and 14% more sale listings.
However, there was no effect for company landlords (which includes the institutional landlords). This data relates to exits, however, a separate question is whether RPZs have reduced the construction of new units. What we do know, is that there has been a sharp fall off in apartment construction and in investment in the BTR/institutional landlord sector over the last three years. Again, the timing of this is significant. The sector grew massively when the 4% caps were in place. It is only in more recent years that we see the fall off. However, there were three crucial shifts that took place and impacted the institutional business model during this period: RPZs tightened to 2%, interest rate increases, and construction inflation. We have no evidence (I repeat, no evidence!) of the extent of the impact these different factors had or the relationship between them. In other words, we don’t know what the impact of increased interest rates and construction costs would have been absent the RPZs, and vice versa, but it is likely the 2% cap played an important role.
Summarising the evidence on supply, we can say that while there is no evidence that rent controls reduce supply and increase exits in general, we do know that when set at 2% they have increased small-scale landlord exits, they have had no impact on the exit of institution landlords, and that they can, in conjunction with other factors, reduce apartment construction. We also know that, despite all of this, the sector as a whole can still grow, although more research is needed on the precise dynamics of this.
3) Stability for tenants: by making rent increases predictable and small, RPZs were intended to reduce uncertainty for tenants and prevent sharp increases from ending tenancies. Also, by limiting the potential for ‘economic evictions’ (i.e. eviction via rent increase), they sought to provide more security of tenure. This was all part of making the PRS a ‘long-term, secure tenure of choice’, as stated in Rebuilding Ireland. Unfortunately, we have no evidence in relation to this issue and it sadly seems unlikely it will play much role in the debate due to the economistic fixation on price and supply.
My TLDR version of all this is that RPZs worked in terms of affordability, had mixed results in terms of not undermining supply, and we don’t know what impact they had on security.
‘Supply, supply, supply’
The supply mantra has become so embedded in our discourse it is practically impossible to have a reasoned conversation about it. In relation to the RPZ debate, it is absolutely crucial that we move beyond the simplistic ‘economics 101’ arguments and base our decisions on a more nuanced view. The Department of Housing’s recent review of the PRS is an example of such a view. The key point here is that supply does not lead to increased affordability in a mechanistic fashion. To be clear, this does not mean that supply is not crucial. We need supply because we need houses to live in, period. But it is to say that we need to be clear about the realities of supply. There are two key and obvious reasons why increased supply does not reduce prices in a mechanistic fashion:
1. There is no ‘housing market’, there are housing markets. An increase in the supply of bungalows in Skibbereen does not reduce the price of mansions in Ballsbridge. The reason is obvious, they are in different places. Moreover, housing in Ballsbridge is primarily a positional good, i.e. it is not a consumption based purchase but one based on social status. This is why houses there enjoy such a premium vis-à-vis other places. House prices in Ballsbridge are determined by the number of rich people, whether or not their wealth and income is increasing, and what their expectations are about future house price growth in the area and their own future income and wealth growth. In other words, we have distinct market locations and distinct market segments. The example I have given is an extreme one. Of course, some markets are more connected. In such cases, there can be a degree of what economists call ‘filtering’. For example, if new apartments are built in one location, it can free up units in adjacent locations. But it is criminally simplistic to jump to the assertion that increasing build-to-rent luxury apartments in the South-East coast of Dublin or the Docklands is going to solve the rental affordability problem at a national or even city level.
2. The second, and in my view more important reason, is quite simply that supply does not determine prices. Even though everyone knows this, it is never mentioned. What determines prices is the relationship between supply and demand. As such, even in the most simplistic economics model, it is not simply the case that supply just needs to increase to achieve affordability. It needs to be increasing faster than demand. This means that an increase in supply can be offset by a parallel increase in demand. Of course, if the demand increase occurs absent any increase in supply, there will be a negative impact on affordability. In other words, increased supply can occur in tandem with increased rents, although it can dampen the rate of rental inflation. But this is not at all how it is argued in the public debate, where the impression is given that tenants will definitely see their rents fall if they just sacrifice more of their income at the altar of supply.
Looking at the demand side, there are many factors at play, but there are four key ones worth mentioning here. First, population growth, including net immigration. Second, income and employment growth, which increases the number of households wishing to form and their purchasing power (and hence demand), Third, the availability of credit and transfers (parental gifts). Fourth, Government spending, especially rent and purchase subsidies. In our own context, the reality is that the first, second and fourth of these, and to some degree the third as well (on the parental gift side) are all likely to increase, and hence it seems to me exceptionally unlikely that increased supply will produce any direct increase in affordability in the sense (which is the only meaningful sense) of a decline in the proportion of income renters spend on rent. Finally, we are being asked to believe two obviously contradictory arguments. On the one hand, we are told that there is an enormous supply deficit, with some arguing we need over 90,000 units per annum to meet demand. At the same time, we are asked to believe that some increase in supply, which will not bring us to even 50% of that figure, will solve all our problems. Both things simply cannot be true. If we are miles away from having enough supply to meet demand, it follows that only impossible levels of new supply could cause rents to fall. In the long term, increased supply could (I emphasize could) reduce prices, depending on the nature and location of that supply and what happens on the demand side, but even in the best case scenario it will take at least a decade. As Keynes said, in the long run we’re all dead.
To be clear, I am absolutely not arguing that supply is not necessary. There can be no question that it is. Moreover, I am not arguing that supply does not impact prices. It does. What I am arguing is that supply is one of the factors that shapes prices in the context of a rather complex dynamic which plays out over time.
The RPZ trilemma
There is a further issue with the mooted reform of the RPZs. According to the Programme for Government, there are three high level policy objectives: increase supply, enhance affordability and increase the rate of homeownership. Removing rent regulation, or even reforming it, can help to achieve the first of these, but at the cost of the other two. Imagining a complete deregulation of rents, it is likely we would see an increased supply of institutional investment in apartments in certain locations. This would be (in my view) welcome. However, deregulation of rents would worsen affordability for renters, as clearly demonstrated by the evidence. Moreover, the deregulation of rents would not just increase the supply of housing, it would also increase demand. If the PRS becomes a more attractive investment, more small-scale and medium-scale landlords will purchase houses, and be willing to pay a higher price for them. As these landlords don’t supply housing (they don’t add to the actual stock of housing, they just redistribute it from the homeownership to the private rental sector), this has no supply impact at the level of the housing system as a whole. It does however, increase demand for house purchases, thus pushing up prices further. In other words, deregulation of rents could have negative affordability impacts for both the purchase and rental sectors! Moreover, more small and medium landlords means fewer homeowners, and hence enticing more landlords to stay or enter the market conflicts with the Government’s stated objective of increasing the rate of homeownership.
In short, the Government faces what we might call an RPZ trilemma, where it can achieve one policy objective (increased supply), but only at the expense of the other two (affordability and homeownership).
Is there a path forward?
So, what does all this mean for the reform of rent regulation? There are a number of potential paths forward:
1. Leave RPZs unchanged: this approach accepts the decline of apartment construction and the exit of small-scale landlords, on the basis that (a) the affordability benefits are too important to lose; (b) BTR high-end apartments are not a typology that is sufficiently responsive to actual housing need; and (c) landlord exits increase the availability of homes for purchase. In reality, however, the fall off in apartment construction, given the supply issues, is probably too much to countenance, and therefore this path is hard to argue for. Moreover, if rents remain capped forever, all rental properties will sooner or later become uneconomic, as eventually they will be massively suppressed vis-à-vis market rents and the price of property. So some level of reform seems inevitable.
2. Minor reforms: There are a number of options along these lines. The most obvious one is to leave the RPZs more or less as they are, but use targeted exemptions to boost supply. For example, dwellings built after a certain date could be exempt from RPZs. Such an approach is used in Denmark, where all units built post-1991 are exempt from rent regulation. Note, it is crucial that this would only apply to construction, and not follow the definition of ‘new properties’ currently in the RPZ legislation, i.e. properties not rented within the previous two years, irrespective of whether they are newly constructed units. If the aim is to increase construction, then the measure should be targeted this way. This can obviously be calibrated in many different ways, for example the exemption could last five or ten years or whatever. Similarly, for existing properties within RPZs, the rent cap could be lifted to 3% or 4% or indeed some other figure.
3. The OECD proposal: Last week, the OECD proposed a model which would regulate rent regulation within tenancies, but not between tenancies. In this case, rent increases remain capped (again this could be at the current 2% or at another figure) during a tenancy. But when a tenancy ends, the landlord can reset the rent to market rates. There are benefits to this proposal. It gives tenants within-tenancy predictability and stability. An additional benefit is that it prevents rents in a given property from becoming extremely disconnected from market rents, as well as the cost of management and maintenance. A final benefit is that the measure is straightforward and should be easy enough to implement and administer. The downsides, however, make it untenable in my view. First, it may not do much for affordability unless the tenancy is quite long lasting. Currently, my understanding is that the average tenancy is around 3 years, but a large chunk of tenancies are shorter than this (I’m open to correction on this, if you have more accurate data on tenancy durations please comment below or email me). This means that properties would be resetting to market rents very frequently. Within-tenancy protections are thus more of a rent stability/predictability measure than an affordability measure. Second, and most importantly, this measure creates perverse incentives for landlords, for rather obvious reasons. Landlords with high tenancy turnover will be the winners. A good landlord who maintains their property and meets their obligations, and hence has happy tenants who remain long-term, will be penalized. It creates an incentive to evict tenants in order to increase rents. While the OECD notes that their proposal requires stronger security of tenure protections, in reality creating an incentive to evict is always going to be a drawback, because the PRS is hard to regulate and compliance is poor. Not just in Ireland but internationally.
4. Reference rents: there are two models of reference rents. The Dutch model links rents to the characteristics of a property, allocating ‘points’ based on location, quality, size, energy efficiency etc. A rent index then translates these points into a given rent level. It thus regulates the setting of initial rents as well as rent increases. The German model is based on a rent index composed of local average rents, also linked to property characteristics. The model varies in different parts of Germany, but my understanding of the basic idea is that initial rents or rent increases cannot exceed this average rent (please correct me if I’m wrong). This can be calibrated, e.g. rents cannot exceed +10% of the index. Moreover, and overall rent cap applies, such that rents cannot be increased by more than a certain percentage within a three year period (I think it’s 15% but am open to correction, I don’t have time to look into at the moment). The logic here is that landlords can re-set rents to bring them into line with average market rents, and therefore rents in a given property don’t remain perpetually suppressed, as they do under the RPZs. On the other hand, rents increases are limited to the average market rent in general (i.e. not rents for new properties), and therefore a kind of ‘lag effect’ occurs where rent increases overall are slowed down. Moreover, depending on how frequently this index is updated, the lag effect can be more or less pronounced. Such a model would seem to overcome a lot of the issues in relation to RPZs, representing a kind of balance between affordability concerns and landlord investment concerns. Germany also has the highest proportion of rental homes of any EU country. However, it does have some limitations. In particular, it is complex. This makes it hard to administer and implement, it may make it difficult for tenants to understand whether or not their landlord is compliant, and it may disincentives landlords if it makes the future income-earning potential of their investment unclear. It is also a model in which the devil is very much in the detail.
So where does this leave us? I would very much not like to be in the position of the new Minister for Housing, as reforming the RPZs is going to be a monumental challenge both from a technical policy design perspective and from a political perspective. As a result of the RPZ trilemma outlined above, it is very difficult to reform RPZs without having at least some negative effect on other policy objectives. It really is a minefield. Transitioning to some kind of reference rent system, possibly with exemptions for new supply, seems the most sensible option, but will be difficult to achieve. The OECD model is attractive in its simplicity, but will not achieve much for affordability and incentivize high turnover, the last thing we need in the middle of a homelessness crisis. Under normal circumstances, my guess would be that the Government would go for the OECD model despite these issues. However, over the last decade I have consistently been surprised by the comparatively pro-tenant nature of PRS reform, especially in relation to rent regulation. I never thought an Irish Government would introduce rent controls in the first place, never mind reducing the cap from 4% to 2%. On this basis, a reference system is more likely. The key question is whether or not the Taoiseach’s recent signaling of a ‘pivot’ to a more pro-private investment represents a significant shift in policy thinking, or just a rhetorical move. If the former is the case, expect something along the lines of the OECD mode. If the latter is the case, expect either minor reforms to RPZs (e.g. additional exemptions) or a reference rent system.
What I’m reading
The three best pieces I’ve read on RPZ reform:
All the Irish research measuring the impact of RPZs in Ireland:
ESRI 2024 research on the impact of RPZs on affordability
https://www.esri.ie/publications/price-regulation-inflation-and-nominal-rigidity-in-housing-rents-0
My previous summaries of the international evidence on rent regulation: