As Housing Crisis Bites, New Government Weighs Changes To Rent Cap Rules And Planning

Ireland's new government is now in place, and it is looking for ways to address one of the country's most pressing issues: an acute housing crisis.

One of the first things it will look at is whether to keep in place a policy capping rent rises in urban areas at 2% a year. It is deeply unpopular with investors and developers, who argue that it stymies new supply, and its removal could pave the way for international funding and PRS investors to return to Dublin.

The problem? Even though the new government has only just been put in place, time is short and the problem is complex and emotive. 

“The [Organisation for Economic Co-operation and Development] has just released a report that said that Ireland will require one of the largest increases in housing stock between 2020 and 2050 within the OECD, and it's all because of our unique position of exceptionally strong population growth,” Deloitte Ireland Chief Economist Kate English said.

“They're really trying to push for compact, high-density urban growth because of our population patterns, otherwise we're going to continue to see inefficient use of land, and frankly, then undersupply."

The first signs of a change in sentiment, amid recognition of the concerning shortfall in completions last year, have come from the top through Taoiseach Micheál Martin and new Minister for Housing James Browne.

Martin has conceded that more needs to be done to incentivise the redevelopment of brownfield industrial sites in cities, with the government set to consider proposals to encourage more private developers to build housing.

“We’ve got to fundamentally look at all aspects of housing policy to get more construction, to get more houses built as fast as we possibly can,” the Fianna Fáil leader said in a television interview as he stressed the need for both the state and the private sector to play a role. “We’re now close to delivering over 10,000 social houses every year. The state investment is the key, and it’s a major investment, but you need both.”

The government is reviewing several aspects of housing policy, which could include changes to the rules capping rent increases to 2% in rent pressure zones.

“The rent pressure zones expire at the end of the year so we have time in between to say: Can we develop an alternative system which protects renters but also enables people to have a clear stable environment in which to invest,” Martin said to RTÉ Radio.

The new Planning and Development Act should help clear the pathway to more homes being delivered, but the window to push through change during this government tenure is already closing and the state is in a race against time to choose its priorities.

Davy recently estimated that 93,000 new units will be needed annually for housing stock per adult to return to its previous ratio of 0.55 if the population grows to six million by 2031. And it has called for urgent reforms, not least an overhaul of rent caps, plus measures to reduce construction costs as well as further streamlining of the planning system for critical infrastructure. 

The OECD report cited by Deloitte's English specifically called out rental caps and said that Ireland needed to change its approach. Its suggestion was to move to a system allowing private rented sector owners to rebase between tenancies and, during tenancy, connect rent rises to inflation.

“A better coordinated and forward-looking approach to housing policies is needed to create investment certainty and increase housing supply,” OECD Chief Economist Álvaro Pereira said when presenting the findings.

The challenge for the government is that any changes will not have an immediate impact, so it is under pressure to act in the early stages of its administration, with the rent pressure zones due for review by late 2025.

“So I'm positive, but we need to see a lot of action in these first six to nine months, and if we don't see movement on some of those policies it’s going to be difficult to see completions increase much further," English said. "The time to act is now.”

The impact of rent caps has been a constant refrain at Bisnow Dublin conferences. Greystar Ireland Managing Director Claire Solon told attendees they meant Ireland was considered “high risk” when compared with other European opportunities.

Meanwhile, Irish Residential Properties REIT CEO Eddie Byrne estimated that the cost of delivering 50,000 new homes a year would be around €20B, beyond the scale of delivery from either the state or Ireland’s domestic players. Ires shares are up 25% year-to-date, largely off rumours of a rent cap review.

“I want to stress that we don’t think that the rent caps should be scrapped, and clearly international investors are used to them in other markets, but the way they are applied in Ireland is too blunt an instrument,” he said.

One of those overseas companies that has been active in Ireland as an alternative debt provider is U.S.-based Harrison Street. Managing Director Ben Chittick said the rent cap had only succeeded in helping to exacerbate the shortage of available properties.

“The purpose has put us backwards. It is not progressive,” he said. “The current theme is uncertainty. Investors need to know they have an exit into a market of scale. But all the pieces are dysfunctional."

But a change to the rent cap system alone won't get enough homes built to house Ireland's fast-growing population.

English stressed that the key is increasing supply across all tenures, social, affordable, private market rental, home ownership, and across the different segments of life from later living to student accommodation.

“We had great progress last year with the updated population forecasts. Finally, there was an acknowledgment of the increase in population forecast, which was included in the draft revision of the National Planning Framework review,” she said.

"But there's still a huge delay in passing that on to our regional economic strategies and therefore our local area plans. And unless there's urgency, none are going to reflect that,” she added. “It's looking like there could be anywhere from a two, three, even four-year delay. There's some prime examples where that has impacted planning permissions because areas had already reached their previous population cap.”

Indeed, almost 30,000 units in large-scale housing developments are either under appeal to An Bord Pleanála or subject to judicial review, according to the Construction Industry Federation, which estimates that over 16,000 units are subject to objections to the planning authority and a further 13,000 to judicial review.

“The majority of residential developments at scale are subject to some observation, or ultimately, objections," Construction Industry Federation Director of Housing and Planning Conor O’Connell said. "The scale of objection and the scale of the issues over the last few years has meant very lengthy delays to a large number of permissions over a significant time frame.”

For now, much of the attention in the real estate sector will fall on what happens to the rent cap and whether changes might see international investors put Ireland on their shopping list more regularly. 

“It won't necessarily be a popular decision from an electorate provision, but we need all forms of supply and all forms of capital and I am hopeful that there is an intention to grasp it and try and move quickly here,” English said.