Government had to choose tenants over investors

Irish Times

a day ago

After months of deliberation the Government seems to have finally settled on a
rent control strategy
.
It is something of a dog's dinner and can best be seen as an attempt to reconcile two things that are fundamentally irreconcilable.
The first is the need to reassure the increasing number of people in
rented accommodation
that their already sky-high rents are not going to be driven even higher by avaricious landlords capitalising on a severe
housing shortage
.
The second is creating the conditions that will entice international institutional investors into the property market, which requires convincing them that they will be able to set and keep rents at a level where they can earn the sort of market-beating returns that would make investing in Ireland an attractive option relative to the myriad of other global opportunities.
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Much of the emphasis is understandably being put on the measures intended to protect existing tenants, which include the extension of rent controls across the State. Rent increases will be subject to a limit – inflation or 2 per cent – and landlords will be severely restricted in their ability to reset rents to market levels when a tenancy ends.
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There will, however, be a distinction drawn between small and large landlords. Those with fewer than three properties will be able to evict tenants and presumably put up rents.
There is less emphasis or detail on the measures intended to encourage institutional investment. New builds will not be subject to rental caps and landlords will be able to increase rent to match inflation. The industry is understood to be disappointed.
The Government will argue with some justification that it has done its best to balance various competing interests and that a compromise was inevitable. Doing nothing was not an option.
The Government is right about that. But how this fudge will work in practice is anyone's guess and the potential for unintended consequences is high. One thing is for sure. Rents will go up. A combination of upward pressure from small landlords at the bottom and a pull from large institutional investors at the top will ensure that rents in the middle also rise.
The details of the plan have not been published but the apparent decision to focus more on protecting tenants than encouraging investors may prove the right one. The inherent contradictions in trying to coax private capital seeking high returns into investing in a sector in which policy is to keep rents down is probably insurmountable.
The most likely outcome is that the new measures will prove sufficient to swing the investment case for some projects already in the pipeline and a few more top-end developments will be built for rent than might have been otherwise. Every little helps of course
The Government would appear to have resisted the entreaties of property developers and their backers as represented by lobby group Irish Institutional Property, which holds that 60 per cent of the funding needed to address the housing shortage must come from international investors. The State and the domestic banks will make up the rest, they believe.
The fundamental problem with this argument is that we are approaching the limit in terms of people who can pay the sort of rent that international investors will be seeking without enduring significant financial pain, which in turn will have a detrimental knock-on effect for the economy.
Most people are already paying rents in excess of what economists deem sustainable, which is between 20 and 35 per cent of net income. The average Irish person earns about €44,000 a year and the average rent is €1,600 a month or about €20,000 a year.
The political pressure that has led to implementation of nationwide rent controls and other pro-tenant measures confirms that we are at the limits of what can be tolerated by society in terms of housing costs. Any international investor looking at investing in housing in Ireland as a long-term bet that will return more than 10 per cent a year would really want to get their head around that before committing. The ones that get in early might do okay, but the risk premium they will want is only going to push up the rent they charge.
The reality is that a property market as badly broken as our one does not represent an appetising low-risk investment opportunity. The system – based around widespread home ownership and the accumulation of private wealth – worked reasonably well for a long time but now it doesn't. The reasons are a combination of factors beyond the State's control and the ball being dropped in areas that are its responsibility, such as planning and infrastructure.
Housing and rental accommodation in particular are increasingly taking on the characteristics of a public good along the lines of health and education in the minds of voters: something the State regulates, provides and supports on a not-for-profit basis. Nationwide rent controls are just further evidence of this.
Health and education are not services that the State looks to fund via hedge funds. They are funded by the exchequer and ultimately in the sovereign debt markets. That is where the Government should be looking for investment. It may now have no choice.