Landlords - Increasing Rents to keep up with interest rates

SkepticOne

I've no doubt that some landlords will push up asking prices for rents in an attempt to compensate for higher interest rates. Figures for Q1 published by daft showed that asking prices were up considerably on the same period a year before. I think in the meantime some of them may have found that simply asking for more rent does not necessarily lead to greater profits. After all, as Miju points out, prices should already be set to maximise profits. Increasing them may only lead to longer vacancy rates thus decreasing returns.

antoinolachtnai points out that "what drives supply is availability of well-priced finance and properties, together with confidence in future capital growth", however the expectation of continual capital growth can also lead to properties being held empty simply for the purpose of capital appreciation, finding tenants not being worth the hassle. Once prices stop rising, these properties will end up either being dumped on the market or rented out for whatever rent can be got.

Raskolnikov

miju wrote:

They have an accetable error rate about 2% and judging from the actual reports from daft.ie it seems daft watch is fairly on the money

Daftwatch merely tallies the number of rental properties that are listed in Ireland that have been listed on the site. One reason why it's not accurate, is because the user base is constantly growing, you only need to view its history on Alexa to see that the number of visitors is increasing. Another reason why it's not an accurate measure of rental supply is because it isn't seasonly adjusted. Holidays, the college year and a number of other factors would cause fluctuations in supply.

Also, daft.ie are a vested interest in the property game, they will do anything to massage the figures to put the best possible spin on the property game. They tried this with the last daft report claiming YOY house price increases despite the fact that the market was in collapse for the last couple of months.

Raskolnikov

SkepticOne wrote:

I've no doubt that some landlords will push up asking prices for rents in an attempt to compensate for higher interest rates.

This will cause additional demand on the cheaper properties, causing those landlords without mortgages to increase rents.

See my previous post.

SkepticOne

Raskolnikov wrote:

This will cause additional demand on the cheaper properties, causing those landlords without mortgages to increase rents.

See my previous post.

I agree that rising interest rates will have an overall upward effect on asking prices. It will not increase overall demand but as you say shift some demand from expensive properties to the cheaper ones. Overall, taking into account increased vacency periods, I would expect no net increase in rents actually paid.

whizzbang

Deleted User wrote:

http://thepropertypin.com/forum/viewforum.php?f=18&sid=4d7b92bfc03a6cd7bad4c4f0cbbb4a76


The flatrate website is something along the lines of reviewing rental accommodation

www.flatrate.ie is more about rating developments than land lords. I'd rather not get sued for libel!

D'Peoples Voice

Raskolnikov wrote:

Daftwatch.........Another reason why it's not an accurate measure of rental supply is because it isn't seasonly adjusted.

I thought the same, when I looked at page 4 of 10
http://www.daft.ie/report/Daft-Rental-Report-August-2007.pdf
a massive vacancy caused by students being off for the summer would cause soft rents during the summer months
BUT, then why does this theory not work for 2002-2006

June 2002 index 110.1 July 2002 108.5 - a reasonable fall

June 2003 index 100.5 July 2003 100.4 - a miniscule fall

June 2004 index 95.8 July 2004 96.9 - an increase

June 2005 index 99.0 July 2005 99.9 - an increase

June 2006 index 105.8 July 2006 107.1 - an increase

yet

June 2007 index 123.6 July 2007 116.7 - a considerable fall

I wonder is it possible that rent-a-room schemes are finally having an impact on rents as Charlie McGreevy once predicted they might?

robd

D'Peoples Voice wrote:

I wonder is it possible that rent-a-room schemes are finally having an impact on rents as Charlie McGreevy once predicted they might?

I suspect, and I think it was mentioned in the Daft report, that there is price seal on what rent is achievable. There is only a certain amount that people can afford and/or willing to pay. After this they move out a little further or into rent at room etc.

Thus rent is far more aligned with wages than with interest rates or cost of housing.

Looking around the area I am, I can see properties that are overpriced by a €200 sitting there. Properties at or near to the avg seem to rent with ease.

There seems to be a problem with landlords at the moment. They leave properties up at the price they want for weeks and weeks, thus losing a month or 2's rent, rather than adjust the price based on interest. In other countries I have lived the rent was aggressively discounted the longer the place was sitting there. As soon as the place became vacant they were discounted. I wonder is this a sign that the Irish rental market hasn't quite matured yet?

Calina

The Irish rental market has no hope of maturing until there is some increased level of trust in it. I have my doubts.

The point is - in rental (as well as in sales I guess) people have an impression of what they are entitled to get. So if property A was getting 1500E six months ago it is very hard six months down the line to justify a discount to 1200E to yourself because it's "worth" 1500pcm.

I've noticed that even as supply is increasing in my locality (up approx 50% on the levels in January when rents started to go a little crazy), so too are rents. I think some of that is interest payment/cost driven. Of course, interest is tax deductible so it shouldn't really be going up to that extent...but asking rents certainly hare. Another thing I have noticed is an increase in rent being charged per week. In my opinion, this is not a sign of a rental market that is maturing, it is a sign of a rental market which is starting to explode.

Part of it is because the country is full of little landlords with one or two BTLs who have bought into the capital appreciation dream and who have no clue what they are doing. To regulate that kind of a market is a nightmare.

Currently I would say that despite all, the market is still weighted in favour of landlords, particularly given the leases which are prevalent, and the provisions of the 2004 rental legislation.

Rent is to a great extent driven by affordability, this is true. But it is not completely true. We have a disproportionate number of rent shares and horrifically expensive smaller units which are poorly designed. That's a planning issue at most. The net result is that affordability is squeezed. I can't afford to rent a house on my own - and I can't afford to rent an apartment on my own. So at the age of 34 - because I'm priced out of the purchase market by about 135000KE - and I am earning well over the band at which the higher tax band comes in - I am still sharing accommodation with strangers.

As rents get more expensive, rentshares will probably get more populous - more couples sharing and the associated social/personal issues that that will cause.

This is not evidence of a market which is maturing imo.

In other words, I think both the rental and sales markets are completely screwed at the moment.

robd

Hey Callina,

I worded my reply a little wrong what I should have said was "is this a sign that the Irish market is immature". My thinking is fairly aligned with your last post.

In other cities I've noticed that rent is very seasonal. Thus what you might get for a place in the Summer near the beach is far higher than you would get in the winter months. Thats just not the case here.

Inexperienced land lords is a big problem here. The BTL tax incentives such as Section 23 have a lot to answer for. I think the tax incentives should have been for institutional investors, such as pension funds. Thus whole complexes would have been owned by a company and administered properly.

Also, I wonder what's going on in the HSE Community Welfare Offices at the moment. The cheaper end of the market seems way out of kilter with what the max the HSE are prepared to pay. Also most of the places advertised on Daft, have a no rent allowance clause.

antoinolachtnai

The section 23 incentive is really only for people who own a number of other properties. It doesn't work for first-timers.

Calina

I'd be interested in a few more details on S23 - I have never taken too much notice of it but I know of a few places which are S23 and owner occupied...is there some special clause when the property is leasehold rather than freehold?

antoinolachtnai

Yes, you can buy a S23 as an owner-occupied property, and you get a tax break. But the tax break is smaller than what you would get if you bought it to let. This means that S23's are generally not good value for owner-occupiers.

robd

antoinolachtnai wrote:

The section 23 incentive is really only for people who own a number of other properties. It doesn't work for first-timers.

Yes thats true alright. It works by allowing individuals to write off the income from other properties against the finance cost of the section 23 property. Basically you can only write rental income off against the relief (not PAYE or self employed income).

In answer to Calina,

As you can also write interest on the loan used to buy a property it thus only works when you have rental income from another property that has non or small finance compared to income. Thus it suits old landlords.

See here (Section 8)

http://www.revenue.ie/leaflets/s23.pdf

The whole BTL did cause a big mess though. Also a lot of people were mis-sold or mis-bought Section 23 properties who didn't understand that (unless you live there) you can't write general income off against a Section 23 (or other relates schemes).

Allowing people to write off the cost of finance is a big problem. If this wasn't allowed by individuals then the BTL thing wouldn't be such a problem. The problem is that it encourages short term ownership and the market can get distorted by investors panicking and trying to sell or putting up rent when the shouldn't be (only allowed once per year).

It would be better IMO if Complexes were owned by Structured Funds where the rent rolled into the fund and the funds could be held tax free by pension funds or taxable at 23% on exit as per other such funds.

antoinolachtnai

Then you are headed into rental-only complexes. I don't know if this is a great idea. If you did this, you'd have to provide for it in the planning permission that only a certain proportion of blocks in an area could be owned by this type of structured funds. Otherwise you are just breeding social stratification.

This type of fund could also potentially knock the crap out of first-time buyers.

Calina

antoinolachtnai wrote:

Then you are headed into rental-only complexes. I don't know if this is a great idea. If you did this, you'd have to provide for it in the planning permission that only a certain proportion of blocks in an area could be owned by this type of structured funds. Otherwise you are just breeding social stratification.

This type of fund could also potentially knock the crap out of first-time buyers.

the issue would be less likely to arise if apartment blocks were built and designed properly. I'd be happy enough to rent indefinitely if the rental set up here wasn't so messy and if the accommodation built was utility based rather than short term profit based.

social stratification doesn't necessarily result - a lot of blocks in Germany, even rented by uhem, professionals, are held this way.

I think the problem is that we have a very myopic view of rental in Ireland and as a result, it tends to colour our opinion. The way the property market has developed in the absence of these blocks completely screwed FTBs anyway - and given the way it's going now, if they already own apartments in urban areas, they are screwed for a while. The only FTBs who are in any sort of a positive position right now are the ones sitting on a fence waiting and seeing who actually haven't bought yet.

The_Conductor

antoinolachtnai wrote:

Then you are headed into rental-only complexes. I don't know if this is a great idea. If you did this, you'd have to provide for it in the planning permission that only a certain proportion of blocks in an area could be owned by this type of structured funds. Otherwise you are just breeding social stratification.

This type of fund could also potentially knock the crap out of first-time buyers.

You already have defacto rental-only complexes all over the place- or complexes with very minimal numbers of owner occuppiers. Where I am at present over 80% of the units are btl units, with fewer than 1 in 6 owner occuppied.

I do agree with you regarding social stratification- where there are large numbers of rental units together you do tend to get a certain social class of immigrants/low income/health board tenants (a generalisation, but one that tends to hold true). Landlords for the most part don't care to invest large sums of money into keeping rental units in tip-top shape, they are more interested in the course of least resistance, paying as little as possible for the maximum possible return- they are investors after all, and its just normal business sense. So- you end up with groups of apartments/houses gradually getting run down, to the extent that no-one much wants them, or wants to live there, unless their options are limited to them.

I could start to list quite a long list of areas around Dublin that are already like this- its not difficult to start at Parnell Street and radiate outwards in an ever lengthening list.......

robd

I'm in the Calina camp on this one.

To suggest that social stratification (wow we're getting deep in Sociology) would result from having institutional owned apartment complexes suggest that you see renting as being an indication of being in the lower classes. Thanks. I completely disagree. There's nothing wrong with renting.

smcarricks argument may hold true for certain complexes but I believe that it's more a factor of location. The complex I live in has a large rental proportion too, but it's distinctly middle classed in a middle class area. Area's like the IFSC are largely professional too.

Also if a complex was completely owned by 1 owner then there would be an onus on upgrading and maintaining the complex to a standard necessary to maintain or grow rental income. Also, I believe the complexes would be built to a higher standard so that they would age better. In the current BTL model the builders interest finishes when they have built and sold the complexes so the don't really care about 5 years down the line let alone 20 or 30.

antoinolachtnai

Well, it seems to be social policy in Ireland to get people to live in their own home. The whole tax system is geared up to discourage buying to let and encourage homeowners. I am not saying that that is right, but that's how it is.

You are right, stratification isn't necessarily a result, but combining it with this worldview and system, it will end up that way.

robd

antoinolachtnai wrote:

Well, it seems to be social policy in Ireland to get people to live in their own home. The whole tax system is geared up to discourage buying to let and encourage homeowners. I am not saying that that is right, but that's how it is

I don't get you here. Do you mean "discourage letting". Investors can write the interest off on their mortgage against rental income so that's a huge tax break.

Calina

I think inertia has a lot to do with that and also that the rental market wasn't all that well regulated until people started winding up slightly longer term in rental than was historically the case in the state. If you wind up with a larger rental section, you'll find that there will be more moves - again - to look at regulating the sector into the future.

I think we could go a long way towards improving things if the PRTB was streamlined and rendered - somehow - more efficient. IE if people didn't have to wait 6 months for decisions and the like. Also, we don't tie in enough of our government databases. I know Revenue are getting much better at watching for non-tax compliant landlords but there is still a tendency to put the onus on tenants to police the landlords which is ultimately a cop out.

_____________________

also would add that even as things stand, BTL is overly supported on an individual basis which leads to the fragmented rental market we have. This has led to a mess in the FTB market for example.

There is a tendency to look at things too simply I think. We need professional landlords, the kinds who have a lot of houses and make a serious business out of this. What we have are a lot of BTLs with one or two properties max. I'm of the opinion that we need to encourage people to make a business of it and discourage the part-timers who see it as their pension - not because it's not a pension, but because it's damaging to the rental sector as a whole. I've always advocated a sliding tax scale for rental properties - ie, the more you have, the less tax you pay on rental income but with a hefty, hefty penalty for continued lack of occupation.

The problem with this is there would be complete outcry if you implemented it and anyway, any changes to the rental market in the short term will cause an implosion and sky rocketing rents as people aim for the exits (and, while we're at it, a total collapse in property sales). It's not going to happen except, possibly, incrementally and over time.

antoinolachtnai

Yes, is true, but on the other hand they have to pay very high stamp duty to get involved in the first place, and they have to pay CGT on exit (which homeowners don't pay). This would certainly discourage institutional investors.

robd

antoinolachtnai wrote:

Yes, is true, but on the other hand they have to pay very high stamp duty to get involved in the first place, and they have to pay CGT on exit (which homeowners don't pay). This would certainly discourage institutional investors.

Yeh the stamp duty is certainly a barrier to entry. Relief could be introduced for this though. If the complex was rolled up into a fund then their would be no tax on rental income and 23% profit would be due for cashing in the fund. Properties sold within the fund aren't liable for CGT. 23% and indeed 20% CGT on disposal is very generous compared to other counties. All the gains can be rolled on without tax until disposal.

Afuera

antoinolachtnai wrote:

Yes, is true, but on the other hand they have to pay very high stamp duty to get involved in the first place, and they have to pay CGT on exit (which homeowners don't pay). This would certainly discourage institutional investors.

I think you're spot on with that observation. I suspect that we've so many small time "accidental" investors since they were able to circumnavigate some or most of these barriers. I'm wondering how many investors got into the game while trying to trade up after 5 years or so and were advised by their friendly bank manager to hold on to their previous property for their pension (and take out a second mortgage to cover the new property)?

D'Peoples Voice

antoinolachtnai wrote:

Then you are headed into rental-only complexes. I don't know if this is a great idea. If you did this, you'd have to provide for it in the planning permission that only a certain proportion of blocks in an area could be owned by this type of structured funds. Otherwise you are just breeding social stratification.

You will find the answers in this publication!
http://www.threshold.ie/documents/InvestmentReportCompleteFINAL.pdf
Arguably the best publication on the Housing Market in Ireland!
Rental yields too low in Ireland - NEVER:D

Nermal

robd wrote:

It works by allowing individuals to write off the income from other properties against the finance cost of the section 23 property. Basically you can only write rental income off against the relief (not PAYE or self employed income).

I thought rent from the S23 property you were financing could be written off too?

robd

Nermal wrote:

I thought rent from the S23 property you were financing could be written off too?

Yes but that doesn't give you anything as you can write the rent from any property off against the finance costs of said property. S23 properties tend to be priced higher than normal properties so the rental income would be far less than the interest component of the finance (this is also true of most property bought in recent years). Thus the benefit is only seen when you can use the finance costs of the S23 property to write off rents from other properties.

dodgyme

Afuera wrote:

small time "accidental" investors ... I'm wondering how many investors got into the game while trying to trade up after 5 years or so and were advised by their friendly bank manager to hold on to their previous property for their pension (and take out a second mortgage to cover the new property)?

They are still advising this,. I know of 2 cases in the last year alone. However I would be worried about this when the only way prices are going is down?

antoinolachtnai

It's still not a bad thing to do. It really depends on how much spare cashflow you have, and what area your old house is in. If you are moving out from the centre towards the outer suburbs, it probably makes sense. If you are doing the opposite, it makes less sense. If you are moving from centre to centre or suburb to suburb, it just depends on the circumstances.

I really think you are overblowing the dangers of this end of the rental market. There are problems, but they aren't really big ones.

If corporates come in, then you'll see rents really shoot up every time there's a squeeze.

Mind you, I think it would make sense for the banks and the PRTB to work together to provide training for first time landlords.