Investors, prospective homeowners, and anyone with a vested interest in living in Ireland should take note of the rapid rates of change in the cost of living in Ireland. For the past seven years, Ireland has seen a steady increase in rental costs, now reaching an all-time average high of €1,366 per month. Dublin, in particular, is now reaching and even exceeding €2,000 per month in some neighbourhoods.
Consequently, Ireland is losing competitiveness to other economically similar countries in the OECD. Ireland is now the fifth most expensive place to live in the European Union, and recent trends in rental prices are a major contributor.
Daft.ie recently published a report for Q1 of 2019 which outlines the major problems in rental supply in Ireland. The root of the housing crisis is a failure of the market to achieve equilibrium; demand outstrips supply, or conversely, the supply is unable to meet the demand of renters and homeowners.
It’s claimed that nearly 80,000 homes will need to be built in Ireland as soon as possible, yet only 500 new homes enter the market each week. An additional 500 per week are estimated to be necessary in order to maintain a steady supply of housing.
Failing to provide this additional needed housing could possibly contribute to a trend that’s been observed following the Celtic Tiger period, namely rental prices skyrocketing at double-digit rates across the country.
Proximity to LRT
In Dublin, home prices near light rapid transit routes are observably rising rapidly. Being near a Luas or a Dart station is driving up house prices in Dublin to the amount of a €129,000 premium simply for living close to a transit stop. ‘Close’ in this case means no more than a 7.5-minute walk from a bus or train stop.
Of course, living in a neighbourhood within walking distance of a commuter network is ideal, but such high premiums are indicative of a severe shortage of affordable housing paired with an ever-growing demand.
Whilst economics can explain a large part of why Ireland is undergoing a housing crisis overall, it doesn’t tell the whole story. Legislation is being put in place to curb some of the power of landlords in an effort to ease up the artificial inflation of rental prices.
Practices such as ‘renoviction’, whereby current tenants are kicked out to facilitate renovations designed to justify raising rental rates, now requires a clear explanation from landlords. As a whole, this legislation favours tenants and is a reaction to the record-low supply across the country.
Rent or Buy?
Legislative reforms granting tenants greater rights and limiting the power of landlords can help to limit exploitative practices, but is this enough to solve Ireland’s housing crisis? One study claims that it’s now more affordable to buy than it is to rent across all of Ireland.
Mortgage payments that amount to less than what the average tenant pays in rent each month may seem like a great opportunity to justify buying rather than renting, but it fails to account for those that cannot or do not wish to make such a commitment. Short-term residents, foreign labourers, and those unable to qualify for a mortgage are all left to fend for themselves in the rental market.
Paul Sheehan of the Simon Communities believes that additional protections for tenants must be enacted and that social and affordable housing will help Ireland escape this crisis. While such a solution may provide some breathing space for current residents, it doesn’t guarantee that long-term supply will be able to match demand, nor does it imply incentives for contractors to choose social or affordable housing over the current model, which is of course very profitable for them.
Another possible solution is to allow free market forces to dictate the Irish property sector with minimal interference from legislators. Naturally, such a solution would deter people from wanting to rent in Ireland and would encourage them to live elsewhere. Furthermore, it may lead to such difficult conditions for existing residents that they may emigrate and move businesses abroad, thus pulling capital resources and productivity out of Ireland. The problem here is two-fold: property prices are skyrocketing whilst the marginal tax rates remain second-highest amongst OECD countries for people earning the average wage.
The manner in which this crisis is resolved matters just as much as the when. Regardless, as an investor or prospective homeowner, Ireland’s housing crisis creates opportunity but also great risk. For now, the housing crisis has exposed underlying weaknesses that could threaten to upend the progress that has been made since the recession and uncertainty has cast a cloud over the future of the market.