The report of the Commission on the Private Rented Residential Sector provides comprehensive recommendations, which, if implemented, would allow the development of a more vibrant and responsive rental sector. These are necessary to meet the needs of a more mobile and flexible society. What is proposed is a regime where an independent Private Residential Tenancies Board will be charged with key responsibilities for the sector. In addition, the report recommends measures to improve security of tenure for tenants.
Perhaps most critical of all, there are recommendations about the tax treatment of the sector intended to encourage the supply of rental accommodation and to allow a more professional approach to letting and managing residential property to emerge.
At present, in the context of rapid increases in property values and the different tax treatment of housing tenures, renting is not an attractive option. Rent is paid mostly out of after-tax income and there is a continuing risk from rental inflation with the prospect of economic eviction as rents increase at rates that exceed even the incomes of successful people.
Tenants need affordable rents but also want the right to make decisions about when to end their tenancy. Landlords want market rents and require vacant possession to obtain capital gains from a market where incentivised owner-occupiers set prices.
Landlords are investors and non-performing investments will be shed. A big influence on this process is the tax treatment of differing investments. When considering the rental sector in this context, it needs to be fully understood that, in the absence of capital gains, the investment return from renting accommodation is generally low. As the supply/demand situation is brought into balance in the housing market and the prospects for future capital gains reduce, investors will be looking more towards rental yields to give them the required return and, it follows, rents can be expected to rise.
For whatever reason, tenants rightly see themselves caught by an unforgiving market that is rigged against them. How should society balance the interests of landlords and tenants in a free market and achieve equilibrium between the various sectors in the housing market?
Unfortunately, there is no objective solution to these problems. They require a political decision. In many ways the core issue to be decided is how can tenants be given the right to continue in occupation for an extended period, at their discretion, with a degree of certainty about their rent. This is what most people mean by security of tenure. At present, private landlords do not offer perpetual security of tenure but do offer security of tenure for a defined period agreed at the beginning of the tenancy.
If thought necessary, it is up to the State to change this. But in doing so the State must not deter investors from becoming, and remaining, landlords. The recommendations of the Commission on the Private Rented Residential Sector are intended to achieve this and take into account the existing market situation. The proposals for providing security of tenure suggested a time period during which the tenant would have discretion over the continuance or determination of the tenancy, provided always that the landlord can repossess with just cause. This is defined as the right to repossess in the event of wanting to occupy the property, to sell, to refurbish it or because the tenant is not complying with the terms of the tenancy. Landlords fear this because they see these proposals where they lose control of their property, reducing its value.
The commission's solution, what might be called conditional security of tenure, recognises market realities and gives the tenant control for a specified time, provided they comply with the terms of the tenancy and they can afford the market rent. This, of course, raises an important consequential problem. The tenant may have no real security of tenure because they may be subject to what can be called an economic eviction in the event of market conditions, such as a shortage of accommodation, driving rents up. The popular if not populist solution to this, rent control, is seen by some as an obvious solution.
The evidence gathered by the commission points to this traditional concept of rent control, what might be called comprehensive rent control, doing more harm than good. It has a variety of adverse effects. For example, it reduces the amount of accommodation in the sector and leads to conflicts between landlords and tenants, as landlords can get a big capital payoff by getting the tenant to vacate.
The alternative, put forward by responsible organisations like Threshold, is a regime of rent regulation, where tenants and landlords negotiate a market rent but the evolution of the rent for the duration of the tenancy is linked to an index based on housing costs or costs of living. This too will have some market effects though, it must be recognised, nowhere as drastic as those of comprehensive rent control.
In short, it is not possible to achieve rent certainty without a cost to tenants or compromising investment incentive. Fixed rents, or fixing the return for the investor for a period, is similar to fixing the interest rate on loans. Generally, the tenant or borrower has to pay for security.
To achieve real tenure choice in a market where there is a considerable shortage of supply requires a fresh look at our tax regime. This can be done in three ways. First, by decreasing the incentives given to owner-occupiers; second, by increasing the incentives available to investors; and third, by subsidising tenants. In the context of a severe supply shortage, the second and third options, combined with existing incentives for owner-occupation, are likely to be highly inflationary and result in higher property prices. Arguably, this was the case before Bacon III. The first is probably at this time politically unattainable.
The solution that is most likely, waiting until the supply shortage is ended, is probably the one that will be adopted. But that is a long-run approach and will not be a solution for many who will lose out in the meantime. Tom Dunne is a lecturer at the Dublin Institute of Technology
