News broke on Sunday that our politicians, with their collective talent for economic genius, are to make more modifications to the housing market:
“Rents for newly-built properties will no longer be capped at 2% annually but will instead be tied to the rate of inflation under plans set to be considered by Cabinet next week.
Changes to the Rent Pressure Zones will be brought to Government by Minister for Housing James Browne on Tuesday.
The move is aimed at giving investors certainty given they currently can make a loss when inflation goes above the 2% mark.”
In plain English, this is just a re-statement of the Government’s policy that the price of rents should be fixed for renters in real term in perpetuity, with a landlord only permitted to make upward adjustments in line with the rate of inflation. It is one of the most awful of the Government’s economic policies, and also one of the most popular.
It is popular because, in short, it gives renters certainty. If you rent a home from me in June 2025, in a part of the country where these rent caps apply, then your rent in real terms is guaranteed to stay the same for as long as the law remains in place. Unlike a mortgage holder with a variable rate, whose repayments might go up or down, yours are fixed. But even a fixed rate mortgage holder does not get this level of certainty: Most mortgages are fixed for five or seven years, after which the bank may renegotiate with you. With rent caps, your outgoings are fixed, essentially, forever.
It also has the happy political narrative of favouring renters over landlords, which works for politicians since renters outnumber landlords. No Irish politician has ever lost votes, on a net basis, for suggesting harsher measures against landlords.
But it is a truly stupid policy – as many popular policies throughout history have been.
Consider the following:
“For existing renters, nothing changes if they stay in their current tenancy.
However if they move, a landlord can reset the rent for the new tenant at the market rate.
Any rent increases after that would be capped at the existing 2% rate.”
The incentives that this creates in the marketplace are obvious. First, existing tenants should be wary about ever moving. A young couple who rent an apartment will benefit from fixed rents for years, but if the Apartment grows too small to accommodate a family, they are penalised for moving.
This is because existing tenants benefit from fixed rent, but new tenants pay the market rate. So the Government is encouraging people to stay in housing unsuitable for them for years longer than they otherwise would.
Further, the policy is a massive red flag for landlords. As I mentioned above, rents are fixed but mortgages are not: So, the Irish Government’s policy leaves landlords in particular enormously vulnerable to interest rate increases if they happen to be renting out a mortgaged property.
It also disincentivises – to a huge degree – investment in the quality of rental housing. Somebody who might otherwise decide to upgrade the windows in a rental property is no longer able to avail of the increased rent that might accrue from providing his tenants with a better property overall. In fact, because the price of the property is fixed at the market rate from the moment it is rented, the rent starts to become uneconomical after just a few months as prices of comparable properties nearby rise. There is therefore little to no economic incentive to perform maintenance or improvement because there is no economic reward for doing so.
What’s more, the policy does not even slow down the rise of rents overall. In fact, it is likely accelerating the rise of rents.
The rent caps do not apply to new rentals – those are rented from day one at the market rate. However, because the rent caps strongly disincentivise existing renters from moving on, the rent caps also artificially lower the number of properties on the market at a given time. This, in turn, through the supply and demand mechanism, pushes the price of new rentals ever higher.
What are we left with? Tenants, stuck for years in starter properties. Landlords, with no incentive to improve those properties. Prospective renters, facing higher prices. So who are the winners?
The winners are a very small cohort of people in very long-term rental arrangements who essentially have had their rent fixed at the rate of inflation in perpetuity. Paradoxically, somebody happy to stay in the same house forever is likely to be older than somebody looking to rent a new place or move up on the property ladder.
The other winners, of course, are big institutional investors, who can set their initial rents at a level that secures a profitable long-term return on a property, and then rely on the law to minimise tenant turnover and its associated costs.
Rent caps are now essentially the settled policy of the entire Irish political firmament. Even some of those on the fringe right favour them, and would go further. But if ever there was a policy that proves that what is popular and what is right are different things, rent caps is that policy.