The laws of economics in a free market are few. Market sentiment usually reflects the
confidence of the customer in the product.
If something is surplus, its price drops, if something is scarce its
price increases. However there’s a
maximum price at the top of a market and the minimum price in a bloated market
can theoretically be zero. All resources
are finite.
Once something is second hand its price drops. You’ll pay a premium if you want to buy brand
new. Products can be anything that a
market will value. I’ve often wondered
where is the logic of the market, when it comes to property.
Property seemed to defy the market logic until 2008. Then it slumped back to 2003 levels in line
with incomes in the public sector. The
explanation that made Ireland uncompetitive as an economy in the noughties was
that wages rose to keep in line with property price increases. Property was a huge contributor to tax
take.
Rent on the other hand fell slightly. Section 23 loans drove speculative property
investment. Buy to let was a no brainer
(remember that expression from the SSIA’s?).
At my very first conference as a councillor in 2005 I recall a
presentation urging councillors to invest their representational allowance in
buy to let properties. The target tenant
was a builder from Eastern Europe! Renting
was money in the bank for nothing.
While many of the buy to let properties rapidly dragged the
investor down, it’s not true to say that all landlords took a hit. More
discerning land lords still had a good business. While household incomes dropped
significantly, rents dropped by low single digits between 2009 and 2014.
No sooner has the turn around come in the economy than rents
are starting to race away again. If you
are on social welfare you can get a rent supplement in addition to your welfare
allowance that will help pay rent. If
you are on a low wage there’s no such cushion.
When I was a councillor I recall when speaking on the issue of rent
supplement querying the absence of a market in Wexford and questioning the role
of landlords locally. Foolishly I
expected support from councillors who would consider themselves to the left of
me. In fact I can recall being shouted
down and interrupted on one occasion. Their
simplistic analysis is that the government should dip into your pocket and
increase rent subsidy.
But why should you subsidise a market that is one in name
only? Why is it that an average property in Wexford which was purchased most
likely over 10 years ago should have an average rent of €629 a month? What are the drivers in that price set by the
landlord? Surely initial cost price, add in the cost of maintaining which the
land lord may well carry, property tax and possibly service charges. The
landlord may appoint an agent who earns a commission. The rest of the running costs are usually
carried by the tenant. The landlord can
offset costs under Section 23 of Bertie’s finance act. But why is there no competition between
landlords?
When most of us were shopping around and looking for a
better deal, prices stubbornly remained above the laws of economics. As tenants left prices should have dropped by
a greater amount than they did. As I pointed
out to councillors about a year ago; almost
half the home purchases in 2013 were straight cash deals. So who still had cash by 2013? Few purchases
were on the basis of first time mortgages in 2012-13, banks had been conspicuously
slow at granting mortgages. Some people were obviously sitting on money and
knew the property market was about to turn. Clearly some properties were bought
by those wanting to get back into the rental market.
But here’s the real problem into the future. People who rent aspire to buy. High rents affects their ability to save a deposit. Without the 10% deposit for first time buyers,
the tenant is stuck in a rut. This may
be the future for many relying on the private sector for housing. There’s little that any shouting councillor
can do about that until there is an intervention in the market to increase
affordability.
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