Friday 22 March 2019

The right moves... Would rent controls work?

The Central Bank
The Central Bank

Paul McNeive

State interventions in the market are sometimes necessary but can lead to unintended consequences.

Property markets are complicated and keep changing and it's not always easy to predict how the market will behave. A good example of this is the Central Bank's limiting of mortgage lending, now interlinked with calls for rent controls, but which together could push rents even higher.

The Central Bank's move to control mortgage lending comes 15 years too late but will lessen the "boom-bust" cycle. The restrictions will have a braking effect on residential values and will feed into some reduction in land values. The reliefs for first time buyers are welcome but the new regime means that many will spend longer renting as they try to save their deposit. Some may give up on the ownership dream and rent long term.

With little supply of new properties there will be increased upward pressure on rents and this has led to new calls for rent controls. But do rent controls work-or could they actually lead to rents increasing further? I think there is a real danger of that happening and especially at the lower end of the market where the crisis is most severe and is resulting in homelessness.

Rent controls were originally an emergency wartime measure and most European and north American cities have some system in place. We already have an element of rent control in that for any tenancy registered with the Private Residential Tenancies Board (PRTB), the landlord can only seek an increase once a year. For a fee of €15 an unhappy tenant can ask the PRTB to set the rent and the new rent cannot be higher than the market rent.But problems arise where controls seek to keep it below the market rate.

At the middle and top end the market regulates itself well in that many landlords are happily renewing with "good tenants" at rents well below market rent. This is because changing tenant will cost the landlord one to three months rent in redecorating and letting fees.

Problems are more acute at the lower end of the market where landlords are seeking to maximise rents from tenants who can't afford them. There have also been problems where Receivers have "repudiated" leases, forcing tenants out. A property with vacant possession is invariably worth more than one with a tenant-and particularly a rent controlled one.

Linking rents to the Consumer Price Index (CPI) is being proposed but this cuts both ways. Rents and the CPI don't move in tandem and in the last recession tenants linked to the CPI would have been paying increasing rents whilst market rents were reducing.

The real reason for high rents is the shortage of supply of housing units and the biggest threat from rent controls is that they might frighten investors/landlords out of the market. This happened in the late 90s when tax relief for investors was abolished in an effort to slow the rise in house prices. This caused a decrease in supply, rents shot up and the measure was reversed.

The market needs more professional large scale landlords like Kennedy Wilson and the Irish Residential Properties REIT who offer quality accommodation and security of tenure. Existing forms of rent control should not cause these any great concern but there is a danger that legislation is seen as the thin end of the wedge.

As Tom Dunne, head of surveying and construction management at DIT told me, "rent controls and security of tenure are interlinked and rent controls can push up rents because tenants will pay more for rent certainty.

"Rent controls suit long term renters best, but most of the market is made up of short term renters.

"It's down to the detail of any scheme" Mr. Dunne added "getting the legal formula wrong could push some landlords out of the market."

Aidan O'Hogan, Chairman of Property Industry Ireland told me that the real problem was a lack of supply and that introducing rent controls would impede new development. Conor O'Donovan, Policy Director of the Society of Chartered Surveyors Ireland said that they have significant reservations around any forms of rent control which risk landlords and institutions exiting the market.

The history of rent controls in Ireland since the 1919 Act has been disastrous and contributed to the Irish passion for home ownership. The government should treat rent control measures with great care.

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