The Rental Strategy Circus

December 15, 2016

three-little-pigs6http://www.thejournal.ie/talks-breakdown-rents-3140799-Dec2016/

“…These were the proposed 4% yearly cap yearly rental raises, more tax incentives to be introduced for landlords, and designating more areas as ’rent pressure zones’ where the caps will apply.

I realise, dear reader, the above may seem absurd in the following context:

There has been a massive rise in rental costs of accommodation leading to the current housing crisis including homelessness. In addition to the massive costs of house prices, young people wishing to start a family in recent years have been burdened with excessive rental accommodation costs further eroding their ability to save for a mortgage.

Flying in the face of arguments from government favouring an approach to incentivising a massive nationwide building programme from the private sector led by developers and private investors the above measures appear feeble in the extreme. The only argument between FF and FG would appear to rest on the question of extending these feeble measure further across the country.

Few will be able to afford the absurd purchase costs of new builds without the cost of new builds dramatically coming down.

The above measures ironically amount to protecting the interests of landlords at the expense of tenants.

Measures such as passing legislation even interim 5yr emergency legislation requiring owners of all vacant houses to offer their properties for rent with government incentives to do this,  NOT on the table.

Large scale emergency apartment builds on government land in urban areas, NOT on the table.

Scaled taxation weighted against area based rental cost calculating excessive loading by landlords exploiting tenants, NOT on the table.

A European system eg Germany with local property development committees determining and fixing the cost of building, the quality of building, the cost of leasing and renting, NOT on the table.

In the past few years since 2014 profits for the private rental sector have risen to between 2 and 3 billion euros per annum.

Profits have mostly been pocketed by the banks.

They propose the sector continue to eat cake albeit with a little less jam confined to 4% increases way in excess of rises in the cost of living index. The profits include profit after maintenance and capital appreciation costs are taken into account.

http://www.thejournal.ie/houses-empty-around-the-country-2783895-May2016/

But is there any sense to the Coveney/Cowen Rental Strategy Circus?

Consider the following:

files.nesc.ie/nesc_reports/en/141_Irelands_Rental_Sector_Background.pdf

Mortgage Finance
For a new  investor who uses  a mortgage  to buy a rental property
the  larger share of rental income will be absorbed by debt repayments.
An  example  is  presented  in  Table  3  of  an  investor  in  North  Dublin  City  using  a  70 percent mortgage (the maximum permitted by the new Central Bank guidelines) to buy a two bed rental property; the mortgage term is 25 years. This yields a modest after tax profit before  capital repayments.  When capital repayments are included the annual cash flow is negative; i.e., the
initial rental income would not cover all of the  mortgage  repayments.    This  may  still  be  a  worthwhile  long term  investment since the  investor  is  accumulating  equity  over  time and  rental  income  can  be expected  to  increase.    The  larger  part  of  the  mortgage  repayments is
covered  by rental  income  while  there  is  also  the  prospect  of  some  capital  appreciation.   After 25 years, the mortgage would be repaid.  If asset prices were to rise by an average of  3  per  cent  annually,  at  that  stage  the  investor  would  have  an  asset  with  a nominal value of almost €450,000.
Interest  rates  have  a  significant  influence  on  the  returns  achieved  by  an  investor using a mortgage.  The average interest rate for first time buyers in Ireland is higher than  the  average  interest  rate  on  new  mortgages  in  the  euro  area.    If  BTL  interest rates  were  two  percentage  points  lower
,  then the  cash flow  on  new  investments would  be  positive.    On  the  other  hand, lower  interest  rates  would  also  increase house prices and thus reduce rental yields.”

The key point to grasp in the above, dear reader, is the cost of the mortgage and crucially the cost of property.

In a fragile recovery with our banks still teetering on the brink, many of its customers with huge loans invested in Buy To Let properties, getting  return on those investments is critical for banks to expect to have their loans repaid.

A dysfunctional property market occurs in a situation where banks themselves depend on a property price bubble to give then a return on their investment into lending into the property sector. Allowing the banks and private sector to set the agenda in this scenario is akin to placing the fox in charge of the chickens.

Instead of bursting the housing bubble it is in the short term interest of the banking sector to create this bubble.

Not only is our property market broken but our economy itself is being sucked dry of economic activity that would otherwise inject volatility into local business interests.

Not only is our economy  sucked dry of jobs in the construction sector but the distribution of wealth into the economy as a consequence is instead appropriated by landlords deep in debt to our banks.

Keeping that bubble going instead of taking some of the steps  outlined earlier appears to be the business of Messers Coveney and Cowen representatives of a dysfunctional politics with no longer the public good at its heart.

Instead they blindly oblige their so-called independent advisors controlled by banks and the profiteering private sector who lead them by the nose into an absurd Circus dealing with rental strategy nothing less than an embarrassment.

Cowen and Coveney in the present politically dysfunctional environment of New Politics would not even qualify in the middle of Winter to be put in charge of a vegetable shop situated in a field of turnips charged with the management of a shortage of turnips.

Nothing short of a public housing programme led by local authorities and capitalised by government is required.

But that might lower house prices and lower rental income and the banks might not get their money back!

In the face of a list of such growing absurdities a 32 county Ireland IRExit in an economic union with Scotland, Wales, UK and possibly Norway does appear to be more attractive.

But Mr Noonan wont even enter into bilateral talks with the UK over Brexit. He leaves this to his puppet masters in Brussels who will dictate the terms of Brexit, end Ireland’s corporation tax independence, impose inter trade tariffs and conditions between Ireland and its largest trading partner, restrict movement on Irish people travelling to the UK!

While Enda Kenny and his compliant and obedient sailors navigate Ireland’s economy over the waterfall.

Postscript:

Legislation to provide for 4% rental increase so poorly drafted members of the opposition pointed out it provided for 8% increase. Its being redacted and redrafted today 16.11.16.

Would it be possible to have an audit of all Dail deputies with a role in the above legislation to assess how much they may be compromised by the fact that they are landlords many holding substantial holdings of property in Ireland? I don’t think so.

They’ve just given themselves their Xmas bonus and are ready to head home on holidays again after making sure their cake has cream on it and at least 4% of jam.

 

 

 

till again

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