John FitzGerald: The longer rent control goes on the more difficult it will be to unwind

A rising population can confer significant economic benefits on a country, among other things, sharing the burden of providing for an elderly population. However, it also brings with it a need for that most expensive commodity – housing. Ireland’s age structure means there are far more people in their 20s who want to move into their own place than there are vacant homes arising as older people die. By contrast, in countries such as Italy where population is actually falling, there is a much more limited need to build new housing, and prices are not under the same pressure.

In Ireland we have the challenge of a shortage of housing, along with a high cost of building. There is intense pressure on the Government to resolve the problem. The only long-term solution is to build more homes, but this takes time. Actions to reduce the cost of building or incentivise new construction, while very important, are not an easy sell to those clamouring for a home straight away.

Surging rents have put pressure on government to take action for those affected. Short-term interventions that enable some households better compete for or afford the existing scarce supply sound attractive and are popular. However, the risk is that measures such as rent controls seriously inhibit the supply of housing over the longer term, with the result that scarcity will persist, leaving many in chronic housing insecurity. There has been much less consideration given to the long-term answer to high rents – increasing the supply of rental housing.

Institutional investment

Ireland needs a major increase in housing supply, but ESRI research shows that households will not be able to finance all the investment needed. The corollary is we will also need substantial investment in housing to rent to reach the required number of homes. In the past, most rental housing was provided by landlords with just one or two properties. However, if we want to provide enough new homes for our population’s needs, institutional investment will be needed to scale up our housing stock.

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For this to work, future tenants must be protected in terms of their security. But those who invest in new rental housing need to be reasonably certain that they can earn an equivalent return from providing new housing to what they could earn from alternative investment opportunities. Otherwise, no one would provide those new residential buildings we badly need.

The latest proposal to control the rise in rents, while apparently attractive, may have very serious long-term ramifications for those who will continue to depend on the rental market. If rent increases are severely controlled, rents for existing tenants will fall behind the market rents being charged to new tenants. If continuing housing scarcity means house prices are rising, landlords will find it increasingly profitable to sell up to a new homeowner and get out of the rental market.

While this will be good for those who can afford to buy, fewer units available to rent will drive up rents for new would-be tenants. Keeping rents low through rent controls will help those who already live in a rented property, but offers no consolation to those who can’t find a place to rent, or pay top rents because such housing has become scarcer.

Rent controls applied to unfurnished rental properties through most of the first half of the last century. Over time, the supply of all new unfurnished accommodation completely dried up, and uncontrolled furnished rentals took their place. That shows how rent controls choke off provision: supply of one form of accommodation evaporated in the face of its rent-control regime.

Unwinding controls

While a short-term stay on rent increases, for example, during the Covid crisis, is sustainable, the longer it goes on the more addictive it is and the more difficult it will be to unwind. This has been the experience in countries, such as Sweden, that have tried this policy.

As the gap between market rents, which would sustain new investment, and controlled rents widens, the ending of rent control becomes increasingly socially disruptive. After years of rent control, if it were suddenly ended it could see large numbers of previously protected tenants rendered homeless. At the same time, if rent control continues, it makes life increasingly precarious for those seeking unavailable accommodation.

Historically, Irish housing policy was largely focused on home ownership, and tenants were a forgotten group. A balanced housing policy would see adequate supplies both of homes to purchase and homes to rent, and make long-term rental a viable option, as it is across most of continental Europe.