There is little doubt that the residential property market is one of the greatest challenges facing Ireland today.
Despite the impact of a global pandemic followed in quick succession by the outbreak of the war in Ukraine, the Irish economy is performing well. However, while our economy continues to recover and grow, the property market is still suffering from the after-effects of both crises.
However, calling this a housing crisis not only understates the severity of the challenges we face, it also implies we simply need to build more houses. While that, in many ways, is true, it is simplistic. We need to build more homes of all types for everybody.
Private investors
Government policy, with some success, has front-loaded the construction of starter homes for first-time buyers. However, our housing market requires a lot more than just homes for first-time buyers.
The potential threats to Ireland now come in four guises
New Irish citizens: ‘I hear the racist and xenophobic slurs on the streets. Everything is blamed on immigrants’
Louth councillors vote to dezone residential land earmarked for hundreds of new homes near Dundalk
Many Irish have voted with their feet but can’t vote in the election. The reason is plain
The number of properties available to rent has fallen significantly in recent years. Private investors are quite literally abandoning the buy-to-let market. For much of the past decade, for every single investor buying into the market, two to three are exiting. In the past 10 years alone, the number of private tenancies in the State fell by more than 80,000. This comes at a time when the need for more rental accommodation was increasing rapidly.
This trend is also corroborated by mortgage statistics from the Central Bank. In June 2012, there were 150,187 outstanding buy-to-Let mortgages according to the Irish Central Bank. By December 2022, this figure dropped to just over 76,000, a fall of 49 per cent in 10 years. In contrast, the total volume of outstanding mortgages for principal private dwellings fell by only 7% in the same period.
Government policy initially indicated that the private rental sector (PRS) was the solution to the rental crisis. However even with this, there was some backtracking. In May, 2021, the Government increased the stamp duty rate to 10 per cent, on purchases of 10 or more residential houses or duplexes at a time. This was a counterintuitive move during an accommodation crisis.
PRS is a relatively new concept in the Irish market, beginning as it did in 2013 when the first institutional funds started investing in rental accommodation. In the intervening years, investment has grown quite quickly with €1.6 billion invested in 2022 alone. But the reality is that investment by PRS funds is simply not sufficient to counteract the net outflow of private buy-to-let investors, and so the rental crisis worsens. This is particularly evident in rural Ireland.
With only three big banks left, are Irish consumers bereft of choice?
Approximately, 71 per cent of all private tenancies are in the greater Dublin area and regional centres of Cork, Limerick, and Galway. As such, most counties in Ireland have less than 5,000 private tenancies each. This is simply not sustainable.
Current market conditions are clearly a direct response to inadequate supply levels and yet, the Government’s policy to date does not address this imbalance at all in the short term. Instead, it focused on capping rental inflation and more recently a ban on evictions. This is akin to treating symptoms rather than addressing the cause of an illness.
There is clear evidence that rental yields for private investors are too low. If one takes the example of a three-bed house in Dublin, with a 70 per cent loan-to-value mortgage. Based on current capital values, rental levels and taking into consideration all expenses, the current net yield is hovering at about 1 per cent
Furthermore, the Government will receive more than 20 per cent of the total rent paid by this tenant through tax.
Clearly, this is just one example, but it does beg the question, are private investors being actively taxed out of the market?
There is no doubt that private landlords require a more equitable tax treatment particularly given the very favourable tax structure offered to other investment vehicles.
Landlord behaviour
The simplest solutions are often the most effective. That said, at this time, it is essential that the measures are of a magnitude that they have a definitive impact on the pattern of behaviour of landlords. I believe we need to reduce the tax applicable to private individual landlords to as low as possible, ideally below 10 per cent for a fixed period of time, perhaps five years, with a more long-term rate applicable thereafter, such as 20 per cent. There must be a commitment to maintaining the 20 per cent rate for an extended period if it is to be effective.
Landlords who own multiple properties could be further facilitated in offsetting all business costs, against tax to encourage the professional landlord sector.
Furthermore, the new 10 per cent rate of stamp duty on purchases of 10 or more residential houses or duplexes at a time, needs to be abolished immediately.
In short, all viable initiatives that address the loss of properties from the rental sector are required urgently. However, they will be only part of the solution. While much has been achieved to date, we are still too far away from equilibrium in the overall market. As such, every effort needs to be made to fast-track the supply of property to the market in the short to medium term.
The lack of rental accommodation is leading to significant hardship for many and is a potential threat to our future economic success.
We should leave no stone unturned in seeking a solution, however unpalatable to the populist culture. The Government successfully steered the country through the Covid-19 emergency, we now need the same approach to the accommodation emergency.
- Marian Finnegan is the managing director of Sherry FitzGerald
