In March 2020, Dermot Desmond wrote a piece for The Irish Times on what he called the financialisation of the housing market here. The tycoon described how Irish apartment blocks had become just another financial asset class that was competing for mobile international capital.
He noted that only 5 per cent of the apartments built in 2019 were put on the open market; the rest were sold to institutional landlords, such as pension funds and international property investment vehicles.
The reason, he explained, was that the rent roll from an Irish apartment block provided a better return for international investors than putting their money into more traditional assets such as government bonds or shares, or even leaving it on deposit with a bank.
If the investor borrowed at the low interest rates then available to buy the apartment block, they could earn up to a 15 per cent return on the cash they put down, he suggested.
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The solution, private investors argue, is to drop the rent caps. In essence, they want to reboot the money machine
It’s not surprising, then, that in 2017 the US property firm Kennedy Wilson described Dublin as “the most attractive property market in Europe”. It has gone on to invest hundreds of millions here and is a large institutional landlord.
In the initial stages, at least the Government encouraged the trend with tax breaks and planning changes. The whole thing took on a life of its own, with developers pre-selling developments to institutions whothen drip-fed the properties into an overheated market to drive rents even higher.
The negative consequences of turning the Irish apartment market into a moneymaking machine for global investment funds are now obvious, the most significant one being that private buyers were squeezed out and forced into renting in a market where rents were among the highest in Europe and constantly rising.
Martin is right that something has to be done, but it would be a retrograde step to do as the industry seems to want
Rent controls were introduced in December 2016 due to political pressure and, in part, because of the consequences for the exchequer of rapidly accelerating rents in terms of the bill for rent supplements paid to low-income families.
Rent pressure zones were first applied to the four Dublin local authorities and Cork City Council before being extended to every large urban area. They limited rent increases for existing tenancies to 4 per cent per year. This limit was changed to match inflation in 2021 and then capped at inflation or 2 per cent, whichever was lower.
Two other things happened in the interim. The ECB marched interest rates up, peaking at 4.75 per cent in September 2023. They are on the way down, but remain at 3.25 per cent. Inflation has also been on a bit of a ride, hitting 4.1 per cent in January 2024 and now down at 1.4 per cent.
It would appear that the Irish apartment block money machine is broken due to a combination of rent controls, rising interest rates and inflation. According to a report in the Business Post last weekend, developers have told the Government that no apartment block funded by private investors has begun construction in the past 12 months, despite numerous projects in the pipeline. It is an investor strike.
The solution, they argue, is to drop the rent caps. In essence, they want to reboot the money machine by allowing rents to rise, so that it once again becomes profitable in the era of higher interest rates and stronger inflation.
The only winners will be institutional investors and the handful of developers and large construction companies that have the wherewithal to build residential projects at a scale that would be attractive to international investors.
Taoiseach Micheál Martin would appear to be buying into the idea. In an interview with RTÉ This Week, he said that the Government plans to review housing policy with a view to incentivising the private sector.
“We need to pivot more strongly to getting more private sector investment into the market” which will “entail politically very difficult decisions”, he said. He spoke of the need “to create a stable environment for investment to flow into the sector . . . particularly in the apartment side”.
Martin is right that something has to be done, but it would be a retrograde step to do as the industry seems to want.
It is also a terrible deal for the taxpayer, as they will ultimately pick up the bill in the form of the various measures that would be needed to offset the impact of the jump in rents that would follow. They would be subsidising the rebooted money machine.
It’s not surprising that in 2017 the US property firm Kennedy Wilson described Dublin as ‘the most attractive property market in Europe’
Rent controls are not the solution either. Economic orthodoxy – as expressed by the IMF in its last report on Ireland – is against them and prefers targeted supports for those most affected.
This would mean a hefty bill for the Government, in the form of high housing assistance payments (HAP) as the rent cap is ended to stimulate apartment building.
There is, of course, some middle ground between the two options, with room for some imaginative solutions. These could involve the State using its cash-rich balance sheet and the planning system to ensure that dropping the cap leads to more affordable homes and not large profits for institutional landlords. It might be worth giving Dermot Desmond a call.
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