The missing rent falls

This third monthly Daft.ie Report, covering both sale and rental segments, has a number of interesting findings that further our understanding of how the Covid-19 pandemic has affected Ireland's housing market. Sale prices rose by 2.3% on average between June and July, a sharp monthly rise and the second in three months, following a 5.3% dip in April.

This rise is not spread evenly around the country, however. Dublin and the rest of Leinster have seen the strongest price gains - 2.7% and 3.4% respectively in July - while elsewhere in the country prices rose by close to 1% in the same month. Taking stock of trends since March, average prices are now higher than their March level in both Dublin and Leinster - but still lower elsewhere. In Connacht-Ulster, prices are 4% below their March level.

This is at odds with the emerging narrative that Covid-19 is allowing people to move away from urban centres, because of the ability to work from home. It remains to be seen if such a shift in preferences in the housing market does take place but it is also worth remembering that urban centres offer not only employment opportunities but other benefits, including retail, leisure and other amenities, which people value.

The data on the number of listings - in both sale and rental markets - also confirms the picture so far that the housing market appears to be avoiding major disruption. The figure below updates the one presented in the last commentary to include July figures. It shows that in the sales market, for example, 2020 saw as many homes put up for sale as any year between 2015 and 2019. Similarly, the rental market (in the right-hand panel) shows a level of activity that is well within normal ranges, if the last few years in the rental market can be thought of as normal.

Some people might view the resilience of Dublin sale prices as something of a puzzle, if everyone is suddenly enabled to work from wherever. However, arguably the greater puzzle is the resilience of Dublin rents. Rents in the capital fell by 2.5% in April, from their March level, but instead of falling further in the months since have actually come back slightly and are now just 2.1% below their March level.

Why might this be a puzzle? Unlike elsewhere the country, Dublin has seen a big increase in rental supply in recent months. Between the start of May and the end of July, the number of rental ads in Dublin this year was almost 50% higher than the same period last year. In the rest of the country, it was 1.5% lower, not higher.

With such a big increase in supply, and with a weak economy as seen in high unemployment, an economist would expect rents to have fallen in May, June and July. There are two reasons why this may not have happened. The first is economic: as I have argued in previous reports, the underlying shortage of rental accommodation in Dublin is very acute - perhaps as high as 70,000 based on the complete lack of construction of rental homes in the 2010s. The lack of rent falls may simply be due to some of that long-run pent-up demand coming on stream, despite the pandemic.

A second explanation is regulatory: the nature of Rent Pressure Zones punishes landlords who cut their rents. If you lower your rent now, the rent you set in 1, 3 and 10 years will reflect the cut you make today. So, however open landlords might be to haggling 'at the door' and offering a month or two free rent at the start to sweeten the deal, they may be very reluctant to flag in an ad that they are indeed cutting their rent. Distinguishing between these two stories will take time and data. For the moment, Ireland's housing market looks to have brushed off the first wave of Covid-19.