Rent controls and unintended consequences


#1

The rent controls introduced in late 2016 are strict. If a tenancy ends the landlord may only let it again for 4% above the previous rent. The exception is when serious renovations have been carried out of course.

Over the last number of months on daft houses with strange advertised rents have started appearing, like €1248, and €1040.

What do this prices have in common? Dividing them by 1.04 will give you a number that ends in two zeroes, almost certainly the previous prevailing rent.

Note that even if a landlord had held rent well below prevailing values for several years, she is not allowed to let it for the market value when the tenancy ends. Just the previous rent plus 4%.

A stark example of this is two nearby properties in Orwell Woods, Rathgar.

First example
No 6 Orwell Woods has three bed and two baths and is advertised at €2500.

Second example
A nearby property (number not shown) in Orwell Woods has three beds and one bath and is advertisedfor €1924, which is coincidentally exactly equal to €1850*1.04.

The second example has no interior photos and one less bathroom. But the law of one price is the law of one price. And near-identical properties in the same location rarely let for 23% less than each other.

What does this mean? Certain landlords are getting far less than the true market value for their property. And even if market prices freeze at 2017 levels, will still take 4 to 5 years of 4%pa increases to get back to where they should be.

It is a transfer of a five-figure sum of wealth from landlord to one lucky tenant. The problem is how does she choose? Unsuccessful applicants from the first example will presumably be interested in the second. Demand is still somewhat elastic, and housing costing a fifth or so less than surrounding ones will achieve spectacular levels of interest.

If am not familiar enough with the legislation to know if it prohibits all sorts of ancillary fees and charges to bridge the gap between the legal rent and the market one. I would not be surprised if there is a lot of creativity in this space in the next few years.


#2

No it isn’t. Nothing is transferred.


#3

Am implicit transfer of wealth.


#4

The outcome is accidental.

Your same argument could be used to state that seven figures sums are being transferred from children of poor kids to rich kids since those poor kids don’t have same opportunities.


#5

I would indeed make that argument, which is incidental.

The tax code is pretty punitive on transactions which take place at non-market prices. Presumably not in this case however.


#6

My emphasis in following quotes.

There is no “true” value since this is not remotely a free market, as any landlord knows. It is highly regulated since it relates to a fundamental human need/right.

I guess you’ll have more time to post here now that you’re no longer Minister of Finance. :smiley:


#7

People mocked me for my forecasts back in 2012 and I guess they always will :smiley:

Prior to the Kelly/Coveney reforms the private rental market was of course subject to all sorts of regulation which had an impact on the overall level of prices.

However there was no specific mechanism to interfere with the [urlhttps://en.wikipedia.org/wiki/Price_discovery]price discovery process at the individual property level.

If you prefer, I can define true market value narrowly as the value a house would achieve on the market absent the Kelly/Coveney reforms to rent-setting.

As my post sets out, anomalies like this are already a feature of the market and will increasingly be so in the next few years.


#8

OK, but I don’t see what’s “true” about that definition.

Here’s an alternative one: the level of rent that provides a “typical” yield for the asset class.

Global REIT returns are running at something like 4-5% in the last 3 years.

Returns in Irish rented property are a combination of net income and capital appreciation. Is there any indication that landlords will achieve less than 5% on this basis? Surely that’s impossible if the caps are actually capping anything.


#9

PS200306 has done an analysis of the daft data here: viewtopic.php?p=917731#p917731

It shows (see below) a clear rise in the number of rental ads where dividing by 1.04 gives you an integer ending in ‘00’. It coincides pretty much perfectly with the introduction of the new legislation.


#11

For all their erroneous talk about De Valera’s Constitution preventing rent controls, I think that Simon ‘Stan Laurel’ Coveney has indeed imposed a breach of constitutional rights. Why should one property owner be discriminated against vis-à-vis a similar property owner? How can that be justified as necessary to achieve a social good. Of course, rent control across areas or for classification of property types would not have created this issue of discriminatory interference with property rights. If I didn’t know better, I would think that this state of affairs was planned in order to undermine rent controls rather than arising from Coveney’s total inability to foresee the consequences of his needlessly complicated plans.

The first unintended consequence of this was that rents went up all over the country, especially in towns that might be subject to similar rules in the future. The next unintended consequence is that tenants will be turfed out so apartments can be refurbished to get higher rents. I am given to understand that if you don’t refurbish you can’t charge the new tenant the higher rent.


#13

I don’t agree - the rent control legislation made provision for a new deposit escrow system (not inacted yet). Once this happens deposits will gradually increase to 3 months with the money being held by PRTB.

From a landlords perspective this will be viewed as a positive.

Anecdote alert
After 6 years I have lost my one and only SW tenant. She moved out because because I insisted on receiving the rent each month (which was last set in 2011). Luckily on getting the property back, I had the option of offsetting her one month deposit against either the accumulated rent arrears (13 months) or the excessive damage caused. To be fair only about 50% of the refurb costs were due to aggressive usage. However it is a hard to replace half a kitchen or shower tray :slight_smile:


#14

A couple close to me bought at the peak, luckily had a decent tracker and both kept their jobs/got other jobs; they moved out of Dublin and had to keep their house as it was in massive negative equity. They rented out their house and subsidised the mortgage despite the tracker as rents collapsed so much - they had a good tenant and didn’t put up the rent; after a few years the tenant had considerable rights and they couldn’t put up the rent without 3/4 months notice - then the rent controls came in.

They are now shit sick of subsidising the housing costs of a stranger and want to increase the rent to market levels but will have to go through a rigmarole to do so - put it up for sale/dolly it up.

The narrative is all about greedy landlords, but the fact is their tenant is on the pigs back living in a lovely house close to Dublin and they are subsidising his lifestyle- anyone do-gooder who thinks that they don’t have the moral right to increase the rent to a level a “new” landlord would charge should get out their own cheque book. They’ve always played by the rules and regret not changing tenants after the first lease was up; the hassle associated with the laws is more than the hassle and risk of a new tenant


#15

Irish Times readers write in from all over the world to confirm that deposit obligations in Ireland are pretty much the least onerous of all.


#16

No, this is wrong. No tenant is being subsidised here. The only group being subsidised, again, are banks taking every measure to continue upwardly warping property prices. Don’t forget the tenant is still paying a rent higher than justified by the true long term economic value of the property (LTEV), so the mortgage payers here should still direct their frustration at the loan pushers who got them in this mess in the first place and helped them massively overpay for the property. There’s no point taking it out on responsible tenants.


#17

They overpaid for the property no doubt. However, they have to pay tax to the government despite making an economic loss on the transaction.

It simply won’t last much longer and the tenant is in for a rude awakening having turned down a reasonable offer. This is the unintended consequence referred to in the title thread.


#18

What reasonable offer did the tenant refuse? The ‘landlord’ wanted to rack up the rent but wasn’t permitted to because the tenant had rights under legislation? ffs. Throw them out on the road. :unamused:


#19

:unamused:

not sure of the details but I think he turned down a lease extension a while back. So they wouldn’t have been able to kick him out by selling. Is that OK?

(In fact, I think he has a house somewhere else (Carlow or Cavan) but when rents dropped in Dublin he decided to cut his commute )

Ironically he refused to pay the water charges. :confused:


#20

I think there’ll always be collateral damage when you detonate or drop a bomb with insufficient warming. Rent control being the bomb here and uncanny landlords being the collateral damage.

Speaking of unintended consequences…I wonder whether the insane rental market is encouraging any owner occupiers in arrears that they really should engage with their bank


#21

Legislation introduced long after the contract was entered into, which had the effect of altering the terms by fiat in favour of the tenant.


#22

I think it is legitimate for the Government to interfere with private property rights in certain circumstances.

The problem I have is the arbitrary different treatment and restriction of identical properties, e.g. similar apartments in a block, and the reward being given to landlords who constantly sought to extract the maximum rent possible from tenants. I don’t think this is a justifiable distinction.