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Analysis: Dysfunctional housing policy is failing a generation of renters

Economist Victor Duggan looks at the rental policy failures that have brought us to the current crisis.

Victor Duggan Economist

Updated Mon 10:00 AM

REPORTED HOMELESSNESS IS at a record high. Unreported homelessness is rampant. Around 50,000 Ukrainian refugees are in emergency shelter. The shortage of student accommodation seems worse than ever despite all the recent investment in that sector. Demand for rental properties races ahead, but supply is at a record low.

Surging rents, sub-standard accommodation and insecure tenure are a huge source of stress, anxiety and frustration, and our still-dysfunctional housing market is largely to blame.

When detailed results of the 2021 Census are published, well over half a million households are likely to be in rented accommodation, about a third of the total and rising. While these are concentrated in younger age cohorts, around 1 in 4 householders in their 40’s are in rented accommodation, and this share is also likely to rise as ‘generation rent’ ages. About 1 in 7 renters are estimated to be renting by choice, but the vast majority would rather be owners.

Housing policy roughly segments renters by income. First, household income limits for social housing range from €25,000 to €42,000 depending on location and household size. Second, households earning too much to be eligible for social housing, but less than €53,000 (around the average household income), are eligible for new ‘cost rental’ housing. Third, households with above average income have no choice but to do battle for the increasingly limited number of available properties in the private rented sector. Progress in boosting supply for these three segments has been a story of, respectively, the good, the bad and the ugly.

Social housing

From the mid-1980s until quite recently, during a time of massive population growth, construction of social housing was minimal. Thankfully, this policy mistake has been reversed, with 5,202 built in 2021 and 8,776 under construction in Q1 2022. Since 2016, waiting lists for social housing have fallen by a third, but still amounted to nearly 60,000 in late 2021.

However, waiting lists are suppressed by the removal of around another 60,000 households benefitting from the Housing Assistance Payment (HAP) towards the cost of their accommodation in the private rental sector.

If the government meets its Housing for All plan target of 9,000 new build-social houses for 2022, this will surpass the previous annual peak of 8,794 in 1975, albeit the population was then less than two-thirds the size. If it delivers the targeted 90,000 by 2030, this will put the annual rate of construction roughly on a par with the peak decade of the 1970’s, even when population size is taken into account.

This should see further gradual reductions in waiting lists and less reliance on HAP. Unlike spending ‘dead money’ on rental supports like HAP, building new social housing is an investment in assets that should appreciate.

Cost rental

‘Cost rental’ is still new to Ireland. By the middle of 2022, only 234 of these new cost-rental homes had been delivered, with average discounts on market rents ranging from 26-42%. The government’s Housing for All plan envisages average delivery of 2,000 new cost-rental homes per annum through 2030.

By then, they will account for significantly less than 1% of the homes in the country. For the majority of potential renters ineligible for social housing and unable to afford private rental, getting their hands on a cost-rental home will be like winning the lotto. It comes as no surprise that recently launched schemes have been massively over-subscribed, requiring allocation by lottery.

A recent Housing Agency study of cost-based housing schemes in Austria, Denmark and Finland showed that these types of homes account for up to a fifth of the national housing stock there, while the main strength of the schemes shared across countries is long-term financial sustainability.

Cost-rental can be an important part of the solution to Ireland’s renal crisis, but it will never be more than window-dressing unless the scale of ambition is increased by an order of magnitude.

Private rental

The private rental sector looks ugly. At the beginning of August, there were only 716 homes available to rent on Daft.ie, a new record low and down from 2,500 at the same time last year. In the year to end-August, private rents increased by 12.7%, well ahead of – and contributing significantly to – headline consumer price inflation (8.7%). The ongoing supply crunch suggests rents will continue to outpace and drive inflation into 2023.

Whereas social housing and cost-rental involve a large degree of government and local authority coordination and financing, the private rental sector is left to the vagaries of the market. It covers people who choose to rent as a lifestyle choice, to migrants crammed into sub-standard accommodation, to students, to people saving to buy and people who can’t get a social or cost-rental home, struggling to make ends meet.

More than a third of private rentals are fully or partly paid for by the State (HAP, RAS, rent supplement). To help make renting a sustainable long-term option, there needs to be a shift towards longer, more secure rental contracts and urgent commencement of the Deposit Protection Scheme provided for in the 2015 Residential Tenancies (Amendment) Act 2015.

But, the only way to sustainably slow runaway rent and house price growth is to bring the supply of new homes in line with demand. This means building enough houses and apartments to account for new household formation, changing household size and a bit over to account for those that become obsolete or uninhabitable in any given year. Housing expert Ronan Lyons estimates a need for close to 50,000 units per year through 2050, far above the government’s target of 33,000 through 2030.

Progress in housebuilding looks set to reverse

One piece of good news is that the post-pandemic rebound in construction saw 25,000 dwellings completed in the year to mid-2022, the most in any 12-month period since 2009. While progress is welcome, this is still far less than annual need, let alone addressing needs built up over a decade of under-construction. So, the problem is still getting worse.

Worryingly, despite further relaxation in Covid restrictions and the glorious Summer weather, new housing starts are down 12% through the first seven months of 2022 compared to the same period in 2021. Factors weighing on starts include rising costs of materials, higher interest rates, difficulties hiring skilled labour, and fears of a sharp slowdown in economic growth. The trend suggests home completions may slow in 2023.

The introduction of ‘use it or lose it’ planning permission and an increase in the Zoned Land Tax to take account of inflation would reduce incentives to hoard land and stimulate housebuilding. If the long-promised Vacant Property Tax is introduced in the budget, this will also help bring some of the more than 100,000 vacant homes to the market.

Budget options

When Irish governments cannot or will not correct a dysfunctional market they tend to throw money at the problem, our money, particularly by way of tax breaks. Often, these are sticking plaster solutions, which may provide welcome relief in the short term, but do little to address longer term challenges. Sometimes they make problems worse.

Consideration is apparently being given to reintroducing a Rental Tax Credit, which will allow renters to offset a portion of their rent against PAYE taxes. In the short term, of course, this will be a welcome drop in the ocean for hard-pressed renters.

This extra money in their pocket might even be enough to cover the increase in their rent over the past year. But, it will obviously do nothing at all to bring down market rents. In fact, by factoring the tax credit into their disposable income it may encourage renters to bid rents up even further. This is not an argument against giving renters a break, just highlighting the urgency of addressing the underlying supply shortage.

There have also been calls for tax breaks for landlords on the basis that they are at a disadvantage with respect to institutional investors, and that this is causing them to sell up, thereby reducing the supply of homes to rent.

But, there is no social or economic justification for landlords to pay less tax on income from a rental property than people pay on income earned through work. If they are paying a marginal tax rate of over 50%, this simply reflects the fact that their income is high enough to bring them into the top income tax bracket. A return to sweetheart tax breaks for landlords risks repeating the policy mistakes that led to Ireland’s last property crash.

Ireland’s rental crisis is acute, with little sign of improvement on the horizon. Progress is slowly being made to tackle social housing waiting lists, but for the vast majority of renters at the mercy of the market, the best they can hope for in the short term seems to be a tax credit that may drive rents higher.

Victor Duggan is an economist.

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Victor Duggan  / Economist

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