Peter Stafford: Private investment in rental market will solve housing crisis

According to estate agents Sherry FitzGerald, one-third of houses sales in 2015 have been by investors selling residential investment property. A further 12 per cent of sales follow bank repossessions of mostly buy-to-let houses.

In the same period, only 18 per cent of houses have been purchased by people intending to rent them out. This flow of housing from the rented sector into owner-occupation comes as demand for rented accommodation is surging.

Between 2011 and 2015, around 40,000 rented properties have been taken out of the housing stock, leaving potential tenants competing for scarce housing at affordable rents. Students, in particular, and workers on modest salaries in urban areas are competing against a growing cohort of well-paid professionals who want the benefits of renting over owning property.

A survey of landlords last year by the Private Residential Tenancies Board revealed one- third of them intended to sell their property when they could afford to, so as house prices rise, this exodus of investment property is likely to continue.

Rent certainty of the type proposed by Minister for the Environment Alan Kelly would be good news for tenants already in situ. Linking rent rises to inflation would shield them from any rapid increase during their occupancy. But new tenancies will remain pegged to market rents, so it does nothing to help those who are trying to find accommodation. New tenants hoping this proposal will result in more plentiful affordable housing are likely to be disappointed.

It would be far more effective to halt the exodus of investment, keep existing rented housing available to tenants and promote more investment into the sector.

The best way to help all tenants, existing and new, is simply to flood the market with high-quality new rental accommodation and make landlords compete against each other for tenants. Experience from London suggests promoting large-scale professional investment in the sector is the best way to control rents over the long term, and force existing landlords to invest more in upkeep of properties.

Government policy should encourage the creation of a professional “build and retain” rented sector, where a professional specialist developer constructs new housing and then acts as the landlord. This could be done by zoning land for long-term rental housing, allowing liability for local property tax against rental income, removing development levies and lowering VAT for new, purpose-built, quality rental accommodation.

By building developments of hundreds of purpose-built rented apartments or family homes for lease, the professional institutional landlord benefits from an economy of scale that they pass on to tenants in increased size and location options, improved amenities and lower rents.

While this new development is coming on stream, the tax base for existing landlords should be reformed to reduce the flow of property out of the sector. Supporting those landlords in financial difficulty by reinstating full mortgage interest relief would go a long way to retaining their existing investment in the sector.

It would be astonishing if any large-scale investment in the Irish private rented sector has been made since proposals to limit rent increases first emerged in the media. Likewise, it is unlikely that further investment will take place until the detail of the policy is set out in full and the legislation enacted.

The way in which this proposal has slowly emerged through the media has had the effect of encouraging many landlords to increase the rent to market rates ahead of the introduction of any controls. It is likely that there are fewer tenants paying below market rent in October 2015 than there were in January. In the meantime, and in the absence of any policy to promote new investment to take the place of lost housing, tenants should expect availability of housing to fall and rents to rise.

It is not unreasonable for any government to look at ways of protecting tenants from the harshness of rapid rent increases. High rents erode quality of life, undermine the financial independence of tenants, and add to wage inflation pressure and the cost of living.

It is clear, however, that the cohort of tenants is increasing at a time when there are fewer places for them to live. Promoting large scale professional investment in the sector will benefit all tenants, not just those fortunate enough to already be paying low rents.

Peter Stafford is director of Property Industry Ireland