Ticking Rental Timebomb

faceman

While dabbling in a debate on property in another forum it got me thinking.. with all this doom talk of property crash, many are predicting an increase of those in the rental market- therefore increasing demand and will inevitably lead to an increase in rents!!

Is anyone else worried about this ticking rental timebomb? When will it go off?

Supercell

Its an interesting question.
Not sure how to vote to be honest.
I'm renting over 15 years now and every year up till 2001 prices went up a little on average. Since 2001 it seems they have stalled for the kind of places I rent (one beds), and even for the same price as 2001 I now get a far better kitted out place than before. Pricing to buy though has gone totally bananas in the same period which seems very odd to me.

On one hand I can see flippers panicking in a slowdown when they cannot sell and having to rent out their properties to pay the mortgage (or a percentage of it) until they sell it.

On the other, if the market tanks because raising interest rates price some out of their own homes ,then there is an increasing amount of people renting. However in that scenario (coupled with likely recession and increasing unemployment) probably many many of the migrant workforce here will just move to the next best country in the EU - thus freeing up more places to rent.

In short, rents should have already risen by huge amounts imho since 2001 , I think in a recession the only bomb coming is falling rents as the huge amounts of migrants currently renting move away coupled with the large percentage of desperate "investors" trying to get some kind of return on their purchase while they try to sell.

If you can explain why rental properties have gotten no more expensive in the last 4-5 years, while having improved in quality and house prices gone totally nuts, then you probably know for sure, I don't!!

faceman

Yes was debating this with friends last nite, most of whom agree there will be a slowdown in house prices as opposed to a crash. Rental demand is strong, and no one until i had asked this Q had considered house prices effects on rent! Any of the property doomsayers out there got an opinion?

Pa ElGrande

faceman wrote:

Yes was debating this with friends last nite, most of whom agree there will be a slowdown in house prices as opposed to a crash. Rental demand is strong, and no one until i had asked this Q had considered house prices effects on rent! Any of the property doomsayers out there got an opinion?

Based on my experience in Dublin city center rental demand is currently high due to the immigrants who arrive for work here, we've had a lot of students coming to Dublin to work during the summer months, and as they leave the slack is being taken up by the returning 3rdlevel student population. My landlord has had no voids, but has experienced high turnover of tenants, also any East Europeans I've spoken to have reported no difficulty in finding rental accomodation. They do however report that conditions are cramped and restrictions on hanging out washing on the balconies of certain new build units are too restrictive. Generally their focus is on value for money and if a rental becomes available that costs €5 per week less they move.

Surprisingly some Dub's I've spoken to who tend to use the Evening Herald as their guide have reported difficulty finding accomodation and are usually pipped to the post by immigrants. I get the impression that some landlords prefer the East Europeans over anyone with a pronounced Dublin accent.

My own direct experience of renting is that I am paying 33% less now than I was in 2001 and live in better quality accomodation, though don't expect to get anything fixed quickly if it breaks, luckily the landlord is ok with me carrying out some of the maintenance, in exchange for reasonable rent I'm ok with this as well.

From what I have studied about previous housing boom/bust cycles, in the event of a downturn in the market, the investors who are in the business for capital appreciation, usually cash in their gains (if they don't chase the market down), thus reducing the supply of rented accomodation, only those in the market for a long time or have bought in a period of low house prices, tend to remain since they tend to have their capital costs paid, it also becomes more attractive as rental prices increase due to this scarcity. In a falling market less people are inclined to buy property expecting further price falls, so rental demand also goes up. This is countered as unemployment also tends to rise so landlords become less inhibited about taking on those on rent allowance and people paying mortages also tend to rent out any spare rooms.

I am expecting rents to increase slighly this year in line with CPI (2 to 5%) and next due to demand and rising interest rates, rates of increase for property in Dublin city center will be likely be low, since most of the tenants are cost sensitive. They will probably reduce or level off again next year as more new-build supply comes on the market in Spring next year. One of the key statistics to come out this week is the reduced number of First Time Buyers in the market, I expect the last bounce of the property market next Spring as the effects of government budget changes and the effects of the SSIA combine for the last hurrah.
I'm not expecting we are going to see any significant changes in the rental market until 2008 when the decline has taken hold. You already know my outlook from the other thread

faceman

Pa ElGrande wrote:

I expect the last bounce of the property market next Spring as the effects of government budget changes and the effects of the SSIA combine for the last hurrah.

SSIA finish up in 2008 not 2007. Too early to speculate on budget, next year is election year...

Victor

Longfield wrote:

If you can explain why rental properties have gotten no more expensive in the last 4-5 years, while having improved in quality and house prices gone totally nuts, then you probably know for sure, I don't!!

Supply has increased to meet demand. While yes there is a very high level of household formation and population increase, there is also very high levels of house completions and existing, underutilised stock is being mananged much better, e.g. both older and younger childless couples are more likely to avail of the Rent-a-Room scheme.

Calina

faceman wrote:

SSIA finish up in 2008 not 2007. Too early to speculate on budget, next year is election year...

Is this right? I started my SSIA right at the end and as far as I know, it's due to complete next year. 2007.

Victor

I think you are right Calina.

threebeards

Calina wrote:

Is this right? I started my SSIA right at the end and as far as I know, it's due to complete next year. 2007.

Yeah, the last of the SSIA's mature in April 07. AFAIK, about 53% of all SSIA's taken out were taken out in the last month.

fintan

I personally think the effect of the SSIA's are over-stated. The amount of shops offering 12 months 0% finance on large ticket items, would suggest that a lot of people have already cashed in before maturity.

faceman

threebeards wrote:

Yeah, the last of the SSIA's mature in April 07. AFAIK, about 53% of all SSIA's taken out were taken out in the last month.

Tail between the legs here, my humble apologies seems you are correct.

As someone who didnt take out an SSIA for other reasons, i can only squint my green eyes at your free money!

This poll is producing some quite interesting stats...

hmmm

You're forgetting the 250,000 Eastern Europeans, mostly living in rented accomodation who will not be hanging around if there is no building work. House prices will collapse, and after a short upwards blip in the rental market so will rents.

Calina

Can't vote in this. Personally I see rents hitting a turbulent period as investulators try to cash in their chips and evicting tenants for property sales into a stagnating market. When/if they can't sell, then I can see property coming back on the market to try and offset some losses via rent, so supply back up, therefore rents back down. If you're a tenant, you'll be trying to time your lease renewal/rent review periods to best effect.

None of the options match this scenario.

faceman

Calina wrote:

Can't vote in this. Personally I see rents hitting a turbulent period as investulators try to cash in their chips and evicting tenants for property sales into a stagnating market. When/if they can't sell, then I can see property coming back on the market to try and offset some losses via rent, so supply back up, therefore rents back down. If you're a tenant, you'll be trying to time your lease renewal/rent review periods to best effect.

None of the options match this scenario.

stagnant market would not prompt increase in sales. Bare in mind too that effects due to shifts in the property market can take years rather than months so its not that quite straightforward.

Pa ElGrande

hmmm wrote:

You're forgetting the 250,000 Eastern Europeans, mostly living in rented accomodation who will not be hanging around if there is no building work. House prices will collapse, and after a short upwards blip in the rental market so will rents.

10% of the population residing here is from abroad, what appears to be happening on the employment front is more Irish men joining the construction sector where the wages are high and Irish women are moving towards the public sector, manufacturing and hospitality sectors have more foreign nationals working for them.

...the construction sector in no way stands out in terms of the number of non-national workers. In Q3 2005, there were 22,600 non-nationals employed in the construction sector in Ireland. However, there were 27,800 employed in manufacturing.

AIB report says almost 160,000 non-nationals in employment in Ireland - 8% of workforce; Magnitude of inflows may slow; Many buying property
Feb 7, 2006, 10:52
http://www.finfacts.com/irelandbusinessnews/publish/article_10004800.shtml

Population and Migration Estimates - April 2006
http://www.cso.ie/releasespublications/documents/population/current/popmig.pdf

Some will return but a lot will settle here permanently, you have only to observe the Irish experience in Britain to see that.

Irish men top of tables in British workplaces
http://www.irishpost.co.uk/news/story.asp?j=4597

That's what they also said in Germany in the 60's when they started their Gastarbeiter program, offering foreign workers (Italians, Spanish, Portuguese, Greeks, Yugoslavs and Turks) visas to work in Germany. At the time the German economy was booming and the wages were much higher than in the foreign workers' home countries. Both the native Germans, and the immigrants, felt that they would arrive, work a few years, earn some money and then go home.

However many, if not most, of the foreigners ended up putting down roots in Germany. Even as unemployment started to rise to the current 10%, and in some cases the home economy (e.g. Spain) was doing well, the foreigners remained in Germany. That's because Germany was now where their life was (they'd got married, their kids were in school, they had a good, rented, appartment etc). The Germans learnt that you're not importing workers, but human beings with all their desires, ideas, dreams and illogicalities.

What will happen in Ireland who knows....

Pa ElGrande

faceman wrote:

stagnant market would not prompt increase in sales. Bare in mind too that effects due to shifts in the property market can take years rather than months so its not that quite straightforward.

A stagnant market would put the focus back on yields rather than capital appreciation, this would imply that first time buyers will not be buying in large numbers, therefore the demand for rental accomodation is higher. The employment situation will also dictate how far rents will rise.

faceman

Pa ElGrande wrote:

A stagnant market would put the focus back on yields rather than capital appreciation, this would imply that first time buyers will not be buying in large numbers, therefore the demand for rental accomodation is higher. The employment situation will also dictate how far rents will rise.

hmmm, im not convinced. We're in a full employment situation. I dont see a stagnant market impacting FTB demand, FTB's are desperate to get on the ladder.

as yer man on morning am on tv3 said the other day, "sure for 700 years we werent allowed on our own land..." LOL no joke.

Pa ElGrande

faceman wrote:

hmmm, im not convinced. We're in a full employment situation. I dont see a stagnant market impacting FTB demand, FTB's are desperate to get on the ladder.

as yer man on morning am on tv3 said the other day, "sure for 700 years we werent allowed on our own land..." LOL no joke.

A stagnant market is were there is a standoff between buyers and sellers and neither sides expectation of value is met, it does not last long.

There are plenty of priced out first time buyers in the market, those that can buy a house have done so, those that cannot, wait until prices drop, their wages rise or they emmigrate. There is over-supply on the market in certain areas, when the capital appreciation element goes, the specuvestor element of the market will try to offload their property at reduced prices in order to move it, once this happens the first-time buyers will also stay away from the market in anticipation of further price falls. It will also be harder to get a bank loan as the banks don't want to lend against a depreciating asset, so what was once a virtuous circle now becomes a vicious cycle.

We are in full employment now, but are undergoing a structural change as manufacturing leaves the country, strange fact - the number of poeople out of work has been increasing this year and so has the number of people in work.

First time buyers may be desperate to get on the ladder now before prices and interest rates rise any higher. When a stagnant of declining market happens that will change as in Australia.

Many people thought the Australian housing market had achieved the holy grail of a ‘soft landing’. But that‘s looking more and more like wishful thinking. Stories are emerging of negative equity and of houses in Sydney being sold at well below prices fetched in 2004.
<snip>
But what was far more telling was the way the residents were talking about property. Here’s a quote from local homeowner Judith Marshall: “Our house was valued two years ago at about A$330,000 [£132,000] and since the market has come back we’re thinking it would be about A$300,000 [£120,000], maybe less. Bricks and mortar is supposed to be the most solid investment of your life, but for many people these days, I think you’re better off renting.”

Those are words to strike terror into the heart of any estate agent. No more talk of how “you can’t go wrong with property.” No more “renting is just paying someone else’s mortgage,” or “renting is dead money.” Now it’s the homeowners who look like they’ve wasted money while the canny renters have avoided the millstone of negative equity.

The real lesson from Australia’s property slump
http://www.moneyweek.com/file/18349/the-real-lesson-from-australias-property-slump-.html

700 years ago most of the country had been conquered by the Normans, who were themselves being conquered by the English. Connaught and the western seaboard would have been the last areas under native Irish control. Under the Brehon codes, the land did not belong to the king or the chief or the landlord, but to the clann, and the lowest of the free-clannsmen had as much an inalienable right to his share as had the chief himself. However under feudalism that came with the Normans this custom was abolised and banished forever when the English came. The native Irish honour code and respect for the law at the time probably made it relatively easy for conquerers at the time to take the country.