RISING RENTS LEADING TO RISING HOUSE PRICES

Rising Rents leading to Rising House Prices

By Ruth Baily

The ESRI have reported that rising rents, particularly in Dublin, are having a double effect on people in their mid twenties to mid thirties. Many are having to stay in the family home longer because higher rental costs are beyond their means while others feel pushed towards buying homes when they might otherwise be happier renting for a few more years.

Rents fell sharply at the beginning of the property crash allowing younger people to move out of the family home. However now that rents are increasing once again, many see better value in buying a home rather that paying the higher rents. This along with the supply shortage is adding to the pressure on house prices.

In a properly functioning housing market there should be adequate supply to meet the needs of all. The best way to help sort this problem out for the long-term is to increase the supply of housing across the market. This would have the effect of stabilising the upwards inflation on both rent and house prices it would also allow people to make decisions about their housing needs when the time is right for them rather than feeling panicked into making decisions sooner that the may have.

However, increasing the supply of housing cannot be done by waiving a magic wand. There are a number of road blocks standing in the way of getting more supply to the market. Access to finance for developers at the moment is difficult with a maximum of 60% equity being loaned on housing projects. This means that developers must have access to 40% of the capital needed to fund a project. Given the recent economic meltdown few, if any, developers have access to this kind of capital. Development levies are still pegged at boom time levels and ultimately add to the end cost of any home. Until these are brought into line with current market conditions few large scale projects will be undertaken.

Planning permissions exist for 30,000 homes in the greater Dublin area, however many of these permissions do not reflect the kinds of homes people want to buy. It is no longer possible to built homes for which there is no demand and expect people to buy them. The Irish consumer is too savvy to be bitten twice. Many of those currently renting but who would rather buy as they watch their rents go up will not buy for the sake of owning anything. The want to buy the home that is right for them. Increasing the supply of homes is the best way to address the rising house prices along with inflation in the rental market.

To read the full report click here