Minister Murphy actively pushing landlords out of the market in the face of the latest Daft report

[Ceist Beag]

Investors entered the market having "done their numbers" eg rent is expected to increase by X plus 10% per year due to the limited supply of properties. Sounds like a good investment so do it, now rents could rise by X plus 10% as that's the market rate but you can only increase it by X plus 4% (in RPZ) so your investment was based on growth of X plus 10% but you are restricted to X plus 4%.

With all due respect, is the first rule of investment not that past results are no indication of future gain! Any investor who invests on the basis of expecting 10% increases per year deserves to be reined in imho.

 

[Ceist Beag]

Fair enough.

I can certainly see why you might be happy enough to accept a discount on the market rent from an existing, reliable tenant. But to be happy offering a discount to somebody with whom you have had no prior experience seems very odd to me. He could default on the rent, destroy the property, etc.

If I'm putting my capital at risk, I have an expectation (but no guarantee) that I will be appropriately rewarded.

Rent controls and unfair taxation materially skew the risk/reward profile of the residential letting business. I decided I was no longer being adequately rewarded for the risk I was carrying so I put my money elsewhere.

See again the narrative here is on the basis of the highest price going. Sarenco if you enter the market you set your price based on what you perceive to be a fair rent at that time. You don't perceive that you are offering it at a discount then do you? So why, if looking for new tenants in 2 years time, do you suddenly think that your original rent +4% is now a discount?
Like I said, I think your bigger concern (and mine too), is the risk of getting a bad tenant and the difficulty you would have in getting rid of them (not to mention the cost). This is where I think the focus should be, not this constant talk about the rent rates.

 

[Firefly]

I think the bigger factor might be the imbalance in any dispute between landlords and tenants and the difficulty of getting rid of bad tenants if you are unlucky enough to end up with some.

I think you are right. A small landlord ( 1 or 2 properties) could be wiped out with a bad tenant and I think these are the landlords leaving the market / not entering the market. The large, institutional landlords can more easily cover a few bad tenents. In addition they seem to be focusing on new, high-end properties which are probably not going to attract as many bad tenents and also not address the lower-end of the market where people are having difficulties.

Lastly of the 6 landlord properties 4 of them were empty.

Hi Andrew365,
I would suspect a lot of landlords (especially those who have bought some time ago with small mortgages) are just leaving their properties idle. Just not worth the risk/hassle/refurb costs. The other option lots are taking is AirBnB for the same reasons
Firefly

Im all for free market trading, but the government will always set out the platform for everyone upon which that free trade is to operate.

The problem is that the government keeps changing the trading platform. Property by its nature is an illiquid asset so it's not difficult to see why new landlords are not rushing into the market (even with rents this high!)

Landlords offering rents below average market rates are simply more competitive. Instead, the discourse appears to be that x is charging a particular rent, so why cant I?

Landlords don't need to be very competitive as demand is outstriping supply. As with any other asset, Landlords are seeking to maximise their return.

 

[The Horseman]

With all due respect, is the first rule of investment not that past results are no indication of future gain! Any investor who invests on the basis of expecting 10% increases per year deserves to be reined in imho.

You have taken me literally when I used the 10% example. It takes years to increase supply in the property sector so an investor could with some degree of confidence expect in a normal functioning market an increase in rent over the short term due to the lack of supply.

In a normal functioning market the law of economics if allowed to work without interference will find its balance. What people forget is that when the rents fell through the floor tenants were complaining, now that rents have risen people don't want to see the landlord actually achieving a peak to offset the trough we experienced when the rents fell.

People have very short memories when it suits them.

 

[Alistair]

The extreme headline rent levels, primarily in Dublin, are largely due to decades of Dublin centric government policy. There is greatest population demand coupled with high wage levels that drives demand in Dublin; this is what is giving rise to the skewed headline reports. Like it or loathe it, Dublin is a victim of the current success its enjoying (everything is cyclical). I don't think anyone in their right mind would like to see a return to a run-down Dublin of the 1980s. Ultimately, for a professional who has the capacity to relocate, to continue living in Dublin is a personal choice down to the individual and they must find a way to reconcile the high rents versus their earning capacity. Its all about personal choice.

Further feeding into this, but a separate issue, is the lack of tax payer funded social housing units. Government policy facilitated tenancy roll-overs form the original qualified occupant of the 1950s to dependents who in turn did not have to meet the same original qualification criteria and subsequently were allowed purchase the government supplied unit, thus reducing the number of social units available, ultimately at a cost to the tax payer.

As a long term landlord, last year I made the difficult decision to exit the Irish BTL market. This is a slow process and one that is still underway. Like the vast majority of small landlords in Ireland, I have been fair with tenants, acted immediately on their feedback, on occasion provided small rent holiday periods when times become really tough for some individual tenants. The government made it clear that they wanted a different kind of BTL investor "a professional landlord" to enter the Irish market, to the demise of the small landlord. That is now happening as a result, in part, of more favorable tax treatment terms of institutional investors. These investment platforms are typically pension funds who have a fiduciary responsibility to their members (pensioners) to maximize their investment return. Failure to do so will give rise to issues for Pension Trustees who govern these investment platforms. Rents will continue to find their level which directly correlates to the demand, but its unrealistic to expect these rents to fall in the short to medium term.

The small landlord carries ALL the downside risk financially and liability-wise from a legal standpoint. The risk versus reward ratio must support the business model in Ireland. Smart money will follow the returns, what ever country that is in. In my own personal experience as a landlord, the net return does come anywhere near supporting the risks. Anecdotally, through my dealings with selling agents the market activity driven by the small BTL investor has fallen off a cliff. That may facilitate more FTBs into the market which is a good thing, but there will be challenges with developers ability to deliver suitable housing stock for a price that falls within the central bank borrowing guidelines.

 

[Sarenco]

See again the narrative here is on the basis of the highest price going. Sarenco if you enter the market you set your price based on what you perceive to be a fair rent at that time. You don't perceive that you are offering it at a discount then do you? So why, if looking for new tenants in 2 years time, do you suddenly think that your original rent +4% is now a discount?
Like I said, I think your bigger concern (and mine too), is the risk of getting a bad tenant and the difficulty you would have in getting rid of them (not to mention the cost). This is where I think the focus should be, not this constant talk about the rent rates.

I'm not sure you are really grasping the impact of the RPZ regime.

Back in 2015, the then Government introduced a new rule to the effect that rents could only be increased every 2 years (still applicable outside RPZs). As we now know, market rents continued to increase dramatically due to the imbalance of supply and demand.

Then in December 2016, the Government introduced the RPZ regime, the effect of which was that rents could only be increased by 4% at the end of the then 2-year review cycle. In other words, many landlords were locked into renting at material discounts to market rates - not by choice but by Government diktat.

You keep arguing that risk and return are somehow independent of each other. They're actually inextricably linked - rental yields are always higher in low-income neighbourhoods because the risk of tenant default is higher. Because the risk is higher, rational landlords demand a higher yield.

More generally, I don't understand why you seem to have a problem with people seeking to maximise the risk-adjusted return on their capital.

 

[Ceist Beag]

More generally, I don't understand why you seem to have a problem with people seeking to maximise the risk-adjusted return on their capital.

The point I'm trying to make is that I think the government should focus on reducing the risk rather than allowing landlords to maximise return. Currently they are attempting to limit the return without any focus on the risk side of the equation and most of the discussion is on the return. In my view the bigger concern is on the risk and this is where the conversation should be focused.

 

[Sarenco]

@Ceist Beag

When you say "reducing the risk" are you talking about putting in place a fit-for-purpose dispute resolution process?

I certainly agree that is an area that is crying out for reform but I happen to think that market participants should be free to price risk without Government interference.

 

[The Horseman]

The point I'm trying to make is that I think the government should focus on reducing the risk rather than allowing landlords to maximise return. Currently they are attempting to limit the return without any focus on the risk side of the equation and most of the discussion is on the return. In my view the bigger concern is on the risk and this is where the conversation should be focused.

Why can't the Govt do both and by doing so you will encourage more into the market and rents will then stabilize for all concerned.

 

[Folsom]

Landlords don't need to be very competitive as demand is outstriping supply.

This suggests a market failure. Which with most commodities is a bad thing, but with a social necessity such as housing it becomes a crisis, and crisis can be dangerous.
And perhaps there is the rub of it. Housing policy has failed and the housing market has failed - is it fair to say it has been broken since 2005 when house building and prices went beserk culminating in the crash in 2008?
So in the middle of a crisis, dealing with a social necessity such as housing, what do we do?
I suggest build more housing in areas of high demand, if possible.
It seems however, that in a market of excess demand over supply that a landlord can soak up the capital appreciation, maximise the return on increasing rents and expect favourable tax reliefs without needing to be competitive?

 

[Ceist Beag]

When you say "reducing the risk" are you talking about putting in place a fit-for-purpose dispute resolution process?

Yes.

 

[Alistair]

I think that Ceist Beag doesn't fully grasp the business model in play. There are 3 key stakeholders to each tenancy agreement, the asset owner (yes it is an earning asset), the tenant who is the debtor and the government who although is a significant beneficiary (~50% tax on rent) but yet does not have any skin in the game... (i.e. landlord's risk is similar to having eggs and bacon for breakfast, the chicken is involved, but the pig is committed...).

Very simple and approximate numbers below:
For example, a landlord will borrow €200,000 @ ~5% from a lending institution (semi commercial rate). Landlord will contribute an additional €50,000 (80% max lending limit, stamp duty, legal costs).
Furnishing costs ~ €10,000 (capitalized @ 12.5% annually, not expensed). Property tax/levy not a deductible expense.

Example 1
Tenant pays €1,000 per month, ~€500 of this is paid by way of income tax by the landlord (assuming top rate PAYE). Landlord has ~€500 net of tax monthly. Until recently only 75% of this interest cost was a deductible expense, but is being graduated back to 100%. (Interest portion only).
Monthly mortgage cost paid by landlord (Principal and Interest) ~ €1,200 per month assuming 20 year repayment term.
Landlord has additional costs including PRTB registration, Buildings Insurance, Life Assurance (usually a condition precedent by the lender).
This example is not financially sustainable for the landlord.

Example 2
Same property, Tenant pays €2,000 per month, ~€1,000 of this is paid by way of income tax by the landlord (assuming top rate PAYE). Landlord has ~€1,000 net of tax monthly.
Mortgage cost paid by landlord (Principal and Interest) ~ €1,200 per month assuming 20 year repayment term.
Landlord has additional costs including PRTB registration, Buildings Insurance, Life Assurance (usually a condition precedent by the lender).
Hours worked and travel costs incurred by landlord in letting a property or dealing with repairs etc is not rechargeable. Allowing for a sinking fund, this is just about break even net of tax and running costs.

I trust you can see that government tax take and the reduced ability to offset landlord costs under this business model is penal and is the main driver of increased rents.

Effectively, landlords are collecting a significant amount of tax for the state without the state having to expend any real effort or carry any risk.

As tenancies naturally expire landlords are and will continue to exit the Irish rental market to seek better return for all the risks and costs involved in this highly volatile market.

 

[Firefly]

This suggests a market failure.

On the contrary. Most (if not all) markets experience periods where demand is greater than supply (and vice versa). Just look at post 2008 when there was a glut of rental properties that drove down rents.

What is a failure is the constant moving of the goalposts by the government and the increasing security tenants enjoy compared to the complete downside risk the landlord is exposed to.

 

[Firefly]

Anecdotally, through my dealings with selling agents the market activity driven by the small BTL investor has fallen off a cliff. That may facilitate more FTBs into the market which is a good thing, but there will be challenges with developers ability to deliver suitable housing stock for a price that falls within the central bank borrowing guidelines.

This is an important point IMO. For whatever reason, there will always be people who will not own their own home. People with the funds need to be encouraged into buying buy-to-lets.

 

[Folsom]

Most (if not all) markets experience periods where demand is greater than supply (and vice versa). Just look at post 2008 when there was a glut of rental properties that drove down rents.

Yes, but when prices are falling or increasing those that are most competitive (providing best value for the product or service) should prevail, driving out inefficiency and poor quality at one end and keeping the prospect of exploitation and exorbitant prices in check at the other end.
What we have now is a situation where there is little need to be competitive.
Competition is a central tenant of the free market. If there no need, or very little need to be competitive, it is a failed market.

 

[Folsom]

What is a failure is the constant moving of the goalposts by the government

Moving goalposts is fine if it provides the platform for a functioning market. In our case, this is also a failure.

 

[Folsom]

Monthly mortgage cost paid by landlord (Principal and Interest) ~ €1,200 per month

How much of €1,200 repayments is interest on the mortgage in year one? And how much of that interest is an allowable deduction against tax?

 

[Ceist Beag]

I think that Ceist Beag doesn't fully grasp the business model in play. There are 3 key stakeholders to each tenancy agreement, the asset owner (yes it is an earning asset), the tenant who is the debtor and the government who although is a significant beneficiary (~50% tax on rent) but yet does not have any skin in the game... (i.e. landlord's risk is similar to having eggs and bacon for breakfast, the chicken is involved, but the pig is committed...).

Very simple and approximate numbers below:
For example, a landlord will borrow €200,000 @ ~5% from a lending institution (semi commercial rate). Landlord will contribute an additional €50,000 (80% max lending limit, stamp duty, legal costs).
Furnishing costs ~ €10,000 (capitalized @ 12.5% annually, not expensed). Property tax/levy not a deductible expense.

Example 1
Tenant pays €1,000 per month, ~€500 of this is paid by way of income tax by the landlord (assuming top rate PAYE). Landlord has ~€500 net of tax monthly. Until recently only 75% of this interest cost was a deductible expense, but is being graduated back to 100%. (Interest portion only).
Monthly mortgage cost paid by landlord (Principal and Interest) ~ €1,200 per month assuming 20 year repayment term.
Landlord has additional costs including PRTB registration, Buildings Insurance, Life Assurance (usually a condition precedent by the lender).
This example is not financially sustainable for the landlord.

Example 2
Same property, Tenant pays €2,000 per month, ~€1,000 of this is paid by way of income tax by the landlord (assuming top rate PAYE). Landlord has ~€1,000 net of tax monthly.
Mortgage cost paid by landlord (Principal and Interest) ~ €1,200 per month assuming 20 year repayment term.
Landlord has additional costs including PRTB registration, Buildings Insurance, Life Assurance (usually a condition precedent by the lender).
Hours worked and travel costs incurred by landlord in letting a property or dealing with repairs etc is not rechargeable. Allowing for a sinking fund, this is just about break even net of tax and running costs.

I trust you can see that government tax take and the reduced ability to offset landlord costs under this business model is penal and is the main driver of increased rents.

Effectively, landlords are collecting a significant amount of tax for the state without the state having to expend any real effort or carry any risk.

As tenancies naturally expire landlords are and will continue to exit the Irish rental market to seek better return for all the risks and costs involved in this highly volatile market.

Alistair I think it is you who doesn't fully grasp any of what I said!
In both examples provided you are talking about a landlord buying a property and letting it out. There is absolutely nothing in any of what I said that suggests the landlord should choose example 1 over example 2. In fact I clearly stated quite the opposite. Do the numbers up front, decide what is a good rate to rent out at and if it looks like a good decision then go for it. My argument has been around the complaints about not being able to raise the rent substantially after the initial let. If you do the numbers correctly up front then there is no reason why you should need to substantially up the rent later (above the allowed 4%).
Show me where what I said bears any relevance to your examples.

 

[Firefly]

Yes, but when prices are falling or increasing those that are most competitive (providing best value for the product or service) should prevail, driving out inefficiency and poor quality at one end and keeping the prospect of exploitation and exorbitant prices in check at the other end.
What we have now is a situation where there is little need to be competitive.

I agree - that's what I am saying. Rents are rising so much that a landlord who wants to stay in the business can get a queue around the corner for viewings. Demand is greater than supply. Why isn't there a massive influx of landlords into the market as the returns look so good? It is because (1) government moving goalposts and (2) downside risk associated with bad tenants are making entering/remaining in the market unnattractive for small landlords, at exactly the time when we need more of them to provide accomodation.

Competition is a central tenant of the free market. If there no need, or very little need to be competitive, it is a failed market.

It's not a failed market as it's not a free market (My points (1) & (2) above).

 

[The Horseman]

Yes, but when prices are falling or increasing those that are most competitive (providing best value for the product or service) should prevail, driving out inefficiency and poor quality at one end and keeping the prospect of exploitation and exorbitant prices in check at the other end.
What we have now is a situation where there is little need to be competitive.
Competition is a central tenant of the free market. If there no need, or very little need to be competitive, it is a failed market.

Competition is indeed central to a free market. The clue is in the "free" part where a market is free to rise and fall due to the constituent parts of the market. This is basic law of economics supply rises to meet demand.

Herein is where we have the issue, the market is not "free" as Govt interference is distorting the market. In a normal functioning "free" market suppliers would come and go based on the attractiveness of the trading environment within that market. As the trading environment is becoming so anti landlord this is one of the reasons more landlords are leaving rather than entering it.