Momentum builds for replacement of rent pressure zones

“I’d like to put this question open to the panel,” said Conor O’Toole, at the Residential Tenancies Board (RTB) conference on 5 December.

Seated to his left at the front in a big room at the Clayton Hotel in the Docklands were four housing experts.

The question was about the future of rent controls, and how rents should be set once the current rent-pressure zone system reaches sunset at the end of this year and if it isn’t renewed.

“To me, the pricing of rents is a really big signal as to how the sector is going to perform,” said O’Toole, who is an associate research professor at the Economic and Social Research Institute (ESRI).

“How do you bring capital into it? How do you meet security or certainty for tenants?” O’Toole asked.

It’s a big issue, said O’Toole at the conference. “I think we need to think it out.”

Indeed, that debate is set to gain more attention as the year progresses.

Revising how rents are set – and moving to a system known as “reference rents” – was one major ask in the majority report from the Housing Commission published in the middle of last year.

Rents should be pegged to the same rate as other local dwellings of similar quality, said the commission report. Rents shouldn’t be allowed to rise more than a certain percentage above that “reference rent”, it said.

Any rent increases should take into account management and maintenance costs, interest rates, housing incomes and affordability, the report said.

Staff at the Housing Agency have been examining what that might mean. The agency is on track to publish its review of this idea, and of rent-pressure zone laws, by the end of March, a spokesperson for that body says.

But downstream of any decision on how new rent controls may work is another decision about how much investment the government is chasing for Ireland’s private rental sector.

That means a call on how big a private-rental sector the country is shooting for, whether it should shrink or balloon, and who will pay for it –  and so what weight is given to the implications of changes for the profitability and viability for investors.

What’s the problem?

In December 2016, then Minister for Housing Simon Coveney brought in a system of rent-pressure zones (RPZs), at first capping rent increases at 4 percent a year – with exemptions for properties that are renovated.

At the time, Coveney said the restrictions would be lifted after three years.

They shouldn’t need to be extended, he said in the Dáil. “Because additional supply, combined with three years of rent predictability will have eased the pressure on the rental market in the area concerned.”

Eight years later, largely, the same system of rental controls is in place.

At the RTB’s conference in December, the gripes against RPZs raised by panellists largely mirrored those found in the Housing Commission’s report.

The Housing Commission cited research by the Economic and Social Research Institute (ESRI) that suggested that RPZs have tempered rent increases overall, but that also suspected widespread non-compliance and poor enforcement particularly when there is tenant turnover.

It mentioned an International Monetary Fund (IMF) report that argued that RPZs in Ireland have contributed to a “two tier” rental market, whereby existing tenants enjoy lower rents and those seeking a new tenancy are faced with significantly higher rents.

It also pointed to concerns that rent regulation can dampen the supply of new homes and discourage landlords from keeping up properties, if they feel they don’t get enough rental income from them.

These were points of discussion at the RTB conference in December.

Maintaining rent controls across tenancies would harm the sector in three ways, said Dermot O’Leary, chief economist at Goodbody Stockbrokers.

“One is in terms of lower supply. Two is in terms of lower quality of the rental stock. And three is in terms of the lower mobility of tenants,” said O’Leary, who was also on the Housing Commission, but disagreed with the recommendation of reference rents.

“These implications get worked out over time,” he said.

David Silke, the interim CEO of the Housing Agency, said his staff have good insight of the quality of rental stock through the body’s work operating a government scheme to buy homes being sold by landlords and rent them to the sitting tenants as cost rentals.

They assess the properties that landlords are selling, he says. “It is kind of a really insightful look at, sort of, what’s happening under the bonnet in terms of the sector.”

He wouldn’t like the idea that because of rent-pressure zones, landlords aren’t maintaining properties, he says. “There is variation. That is what I’m seeing.”

“Some of the properties are really well kept. Really good quality. You know, they’re excellent properties. And some of them are less so,” he says.

Pat Davitt, the CEO of the Institute of Professional Auctioneers and Valuers (IPAV), pointed to how some landlords who had fixed rents low back in 2016 are unable to raise them enough to meet the market.

That’s unfair, he said.

Landlords should be able to raise rents more than 2 percent between tenancies, he said. “Whatever is there and whatever isn’t, it needs to be fair.”

Ann-Marie O’Reilly, the national advocacy manager at Threshold, said she thinks a system of reference rents could be much fairer than the current RPZ system.

Reference rents would mean rents are set in line with the quality and amenities of a property, she said. “So you are getting value for money.”

But “it is going to be difficult to figure this out”, said O’Reilly.

Striking a balance

Other European countries do have handy examples of reference rents to look to, but also wider housing systems and rental laws that differ greatly from Ireland’s.

Many raise the same question about their system of reference rents as those starting to look at models here: how simple or complicated should it be?

Sweden’s system is basically an attempt to find balance between unregulated market rents and too much regulation, says Erik Elmgren, managing director of the Swedish Union of Tenants.

“We in Sweden have maybe found a system that is somewhere between the two,” he said on the phone last week.

Sweden – where about a third of people live in the private rental market – has a system whereby tenants, backed by tenants’ union helpers, negotiate with landlords on the rent.

There is a “reference rent” element too. Rents can’t be more than 5 percent higher than other comparable flats, the rules say.

But unlike in Ireland, Sweden has a more than century-old tenants’ union representing 580,000 households, says Elmgren. “We negotiate rents for 1.5 million apartments every year, with the landlords.”

It has 800 staff, with 120 professional negotiators, he said. “It needs to be big to protect the tenant and give a solid voice against the landlord.”

Also in Sweden, tenants have strong security of tenure, which gives them leverage in those annual talks, said Elmgren. “That’s important.”

“Our aim is to land on the inflation,” he says. Rent inflation in Sweden ran at about 2 percent for a long time, he said. In the last three years, they have seen larger average hikes of between 4 and 5 percent.

Those have been driven by interest-rate rises, and higher utility fees, and maintenance costs, he said.

Renting in Sweden isn’t without its issues. There is the blight of short-term lets, says Elmgren.

There is also a black market with subletting via second-hand or third- or fourth-hand contracts, he says. “We have problems there with high rents.” But that is a small group, says Elmgren.

Germany’s system of reference rents, meanwhile, has become much more elaborate over the years, says Stefan Kofner, an economist and professor of real estate and construction management at the Zittau/Görlitz University of Applied Sciences.

The country has had a local reference rent system since 1971, Kofner said, underpinned by “mietspiegel” or “rental mirrors”, which set out key criteria for homes such as the size and year of construction and location, sometimes even by street, as well as amenities and quality.

“These rental tables, I think they are necessary for such a system,” he says.

In the past, there were often delays in updating these rent mirrors and differences in how they were applied, but it has been more standardised, he said. “Recently they were made obligatory for cities with at least 50,000 inhabitants.”

Landlords can look at the rental table, search for what matches their rental, and work out the prospective local reference rent, he says. Tenants can check the tables to see if a landlord is charging the right rent.

The regulations have become more extensive, he said. “Before 2013, I would call it a market-oriented system,” he says.

In 2013, the government added rent-increase caps for sitting tenants in hot spots, he said.

But there was a market split between rent levels between lower-paying long-sitting tenants and higher-paying newer renters, he said. “Because new reletting was not effectively regulated.”

So in 2015, a “rent brake” also came in that applied to newly signed leases, meaning landlords could take the local reference rent and only add up to 10 percent, he said.

There are still exemptions to the rent brake for landlords of newly built dwellings or when a landlord is renting to a new tenant after refurbishing, he says, but it was a fundamental change.

Meanwhile, many landlords don’t respect the rules, Kofner said. “And also the tenants are not active enough to follow their rights and they just don’t do anything about it.”

If you’re in a queue of 100 for a rental, you aren’t going to question how the rent is set, he says. “You don’t discuss clauses.”

As Kofner sees it, ever tighter regulation is not the answer and somehow you have to grow out of a regulatory spiral of tighter and tighter rules.

“I can’t say that the situation here is good,” he says.

Looking for here

Running through debates around the prospect of bringing new reference rents in Ireland is the same question of how simple a system to shoot for, and also how to make a smooth transition.

Lorcan Sirr, a senior lecturer and housing policy analyst at TU Dublin, says he has a concern that it could lead to more confusion as changes couldn’t apply to existing contracts.

So, you could have “the creation of a third-type of tenant tranche: RPZs, non-RPZs, and now people on reference rents”, he says.

A second concern would be about how reference rents are set, said Sirr. “Who’s to do it? Based on what? And how they take into account things like quality of properties, not just the number of square metres.”

How to decide what price to put on those is a question that Gareth Redmond, a policy officer at Threshold, has been scratching his head about. He is still working on that question, he says.

He admires the Dutch system for setting reference rents and its slick online tool, says Redmond.

It draws in quite a few characteristics. The tool awards points for size of the house, energy rating,  indoor amenities, outdoor amenities and so on – and then each point is awarded a euro price. “That system is, in my opinion, quite good in setting criteria,” Redmond says.

He wouldn’t take everything from the Dutch system, he says. The Dutch also have three categories of properties – two categories with rent ceilings depending on the number of points, and a high-point segment which is totally unregulated.

“Lots of people are using BER [building energy rating] upgrades to raise the property to the unregulated sector,” he says.

Likewise, Cian O’Callaghan, the Social Democrats spokesperson on housing, said he would want to see tightly defined objective data and criteria. “Size, number of rooms, BER, immediate amenities.”

“You don’t want people being, oh, there’s a green space within 100m that’s an extra €100,” he says.

Then there are those who say that including lots of criteria is a recipe for disputes and bureaucracy.

Sinn Féin favours a much simpler version of reference rents, says Eoin Ó Broin TD, that party’s housing spokesperson.

People may argue to take into account all kinds of things – mould, type of windows, the age of the property, he says. But “once you go down that route it becomes very administratively complex”.

As he sees it, the government should set an equivalised average rent simply by location and size of property, combining new and existing rents, he said. The RTB has that data already, he said.

Next step would be a rent freeze for all properties, he says. Existing rentals would have their rents frozen at the same level they are at for three years and new properties would have to come online at that published average rent.

Once three years was up, rent reviews would have to be in line with an index, he said. So, “what would the index be?”

Landlords face a challenge if interest rates go up, he said. “So having some kind of an index with wage inflation and interest rates – how you might weight them would be an issue.”

You wouldn’t have a case where people’s rents would drop straight away for existing tenancies, he says.

“If my landlord today is charging me more than the reference rents, they’ll continue charging me more than the reference rents. Because that’s my contract,” he says, so you can’t change that retrospectively.

What is needed?

Any review of reference rents published by the Housing Agency in the next few months is likely to be picked over for its impact on investment in the rental sector.

On 5 December, panellists talked about the future of renting.

“It’s going to be a much bigger sector over the next number of years,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers.

There’s debate about the actual requirement, he said, but it would be tens of thousands of private rental homes if the tenure mix holds the same.

But it’s not clear whether the tenure mix should remain the same.

An as-yet unanswered question is whether government policy is to shrink the private-rental sector – in favour of growing the social, not-for-profit affordable-rental, and owner-occupier sectors – or to grow it.

That has implications for how much investment, and what kind of funding, the incoming government wants to see in future years into the private rental sector to achieve that.

“While national high-level housing targets have been agreed, tenure specific and local targets have not yet been considered by Government,” said a spokesperson for the Department of Housing last week.

“These will fall to the incoming Government to consider and agree and will include tenure splits,” they said.

New private-rentals is the type of housing Dublin city needs least over the next few years, according to an assessment done to inform the council’s current development plan.

Private rentals should be about 15 percent of new builds each year, says that analysis. A greater share is needed of social housing (38 percent), affordable rental (29 percent), and owner occupier (18 percent).

Elsewhere, the impact of reference rents and controls on investment is also a point of debate.

In Germany, policymakers took into account the impact of rent controls on construction by exempting apartments built after 1 January 2015 from the rent brake that caps rents and links them to the local reference rent.

So it shouldn’t be a disincentive to investment, said Kofner, the German housing professor.

Still he had asked himself if that exemption would run forever, he said. “You have a growing segment of the market excluded.”

That was a point of dispute in the government coalition in Berlin that recently broke down. The Social Democratic Party wanted to extend the construction year, he said. “They wanted to move it to 2019.”

Kofner thinks that kind of discussion leads to uncertainty for landlords which does impact on investment, he said.

Elmgren, of the Swedish Tenants Union, says their negotiated system hasn’t discouraged private investment in the rental market.

Landlords know that rents will grow predictably even if gently, he says.

“What does capital seek? It’s a stable investment.”

Ó Broin, the Sinn Féin TD, said he would reject claims that his proposal would kill off all investment in the private-rental market.

“We don’t need more high-cost speculative investment in the private-rental sector,” he said. “What we want is people to come in who are looking for a long-term stable reasonable yield and charging a reasonable rent.”