Stephen Faughnan is the Chairman of the Irish Property Owners Association (IPOA), the national landlords’ representative organisation, established in 1993, to represent the interest of providers of residential property; to increase professionalism within the industry through education and training and to provide advisory and support services to members. IPOA is a company limited by guarantee and is a not for profit organisation.
Rent Certainty vs Supply Certainty
Rent Certainty is another name for Rent Control, which always leads to a reduction of accommodation available and seriously damages the private rental market. This is backed up by numerous reports, including the European Commission Report, Rental Market Regulations in the European Union1. Last September’s DKM report, Rent Stability in the Private Rented Sector2, states unequivocally that “the impact of rent regulation on supply is uncertain” and then goes on to say clearly that “rent regulation would also affect efforts to attract new investment in the Irish rented sector” and that “this could lead to a further recapitalisation being required by banks by increasing the write-downs they would have to take on their buy-to-let portfolios”3.
What is required is Supply Certainty; we need an adequate supply of good quality accommodation to house our population. Fair tax treatment will do a lot to resolve this problem without interference in the market. The current problem in housing is lack of supply, and this affects social housing, private rented accommodation, and property available for owner occupiers. We know from the DKM report that 30% of landlords intend to leave the private rental market, and this is going to reduce the amount of available rental accommodation4. As well as that, 70% of landlords have loans and 71% of them have insufficient income from their rental property to pay their mortgage and taxes5. Rental properties for these investors is increasingly becoming an unsustainable business.
To increase supply, we need investors who want to invest and who can make a sustainable return from investing in rental property. The current unfair tax treatment has caused investors to pay tax in a loss-making situation, which is resulting in investors leaving the market, reducing the amount of accommodation available for rent. Mortgage Interest Relief against rental income was reduced for the private rental sector from 100% to 75%. The effect of this was not only on investors going forward, but on investors already in the market, whose investment was predicated on the basis that interest paid to the bank on a rental property was a legitimate business expense. The response of Government appeared to blame landlords for the housing crash and punitive measures were put in place to punish the sector, including refusing to accept legitimate expenses against rental income, the reduction in interest allowable, and punitive penalties for the Non-Principal Private Residence Charge. This action was taken against the backdrop of reducing rents. It is interesting that the commercial rental sector are still allowed 100% Mortgage Interest Relief, indicating that housing its citizens is of less importance to the Government than providing offices and shops.
The cost for a landlord to provide private rental accommodation has increased by between 20 and 26%6, mainly due to unfair costs imposed by the Government, as outlined above, but also including Local Property Tax (for services provided for the benefit of tenants), and unrealistic standards (particularly in regard to older stock which is not as easy to convert due to planning restrictions; for example, bedsits). In a dismal economic scenario such as this, Rent Certainty is not possible because there is no cost certainty in the provision of private rental accommodation.
Writing in the Irish Independent last year, Mark Keenan noted the following about Rent Control in other jurisdictions:
“In Germany … Irish people who rent for the first time there are often surprised to find themselves in an all-white painted shell with no kitchen white goods, no carpets, no fittings and no light bulbs. It is up to tenants to spend thousands on these because landlords must recoup rents, which are regularly 30% below what the market suggests. Rent Controls have led to periodic housing shortages as landlords stay out of the market when rents are below what is economically plausible. In America, we see vastly different amounts charged for similar apartments in the same blocks according to length of tenancy. It has resulted in newer arrivals paying far above what might be expected for their units in order to subsidise the landlord for longer term tenants paying far below what is reasonable.”7
Providing rental accommodation is important and its importance needs to be recognised. It needs to be considered as a business, and be taxed like a business. The law around the sector requires professionalism, and it is right that tenants should also be treated in a professional manner. Large investment firms have entered into the market, but these are companies who purchase properties at low values, manage them efficiently, charge real market rents, but may sell them on at an increased price before exiting the rental sector when new and emerging markets with better capital appreciations emerge.
The market currently sets the rent, as it should. If there are an adequate number of properties in the market, rent remains relatively stable. When there was an oversupply of accommodation, rent decreased and the current under-supply of property inevitably means that rents have to increase. However, the underlying message must be that having a sustainable private rental business sector is the best insurance against a cartel developing of so-called “vulture funds” due to a low number of independent investors. In the present market, 67% of private landlords have just one property, while 84% have two or less and 90% have three or less8. With the snapping up of distressed properties by foreign conglomerates, those figures are bound to dramatically change, but it will not be a change for the better as far as both tenants and landlords are concerned.
Leaving the last word to Mark Keenan, he concluded in his article that
“almost all economists (including those on the left) tend to be convinced that Rent Controls can only make a bigger mess of things. There is only one plausible way to make rents cheaper and accommodation more readily available – to provide many more homes to live in. Anything else is a dangerous distraction.”9