It’s unfortunately becoming the norm that Dublin city rents are the highest in the country but every county is being affected these days. Figures from the latest Daft.ie rental report now show an increase in the average rent nationwide of 9.3% in the year to March 2016. This represents a remarkably persistent rate of rental inflation, with the average annual increase in rents since the second quarter of 2014 being 9.6%. While there has been a shift in the composition of rental inflation it is happening away from Dublin and towards the other cities in the rest of Leinster in particular.
Ronan Lyons, Daft’s in-house economist said there is the danger that this very high rate of inflation becomes something of a new normal.
“There is nothing normal – or indeed sustainable – about inflation in rents of 10%. This is particularly the case, given that the rate of inflation in the wider economy is close to 0%. In other words, if this situation persisted into the future, the average household would have to devote an ever greater share of its income, just to pay its rent.”
Lyons explained that the rule of thumb about a household’s accommodation costs, in the form of rents or mortgage payments, should not be greater than roughly one third of the household’s disposable income.
“If we take a household whose gross income is €45,000, this leaves them with roughly €3,000 a month in their after–tax disposable income. This means a household earning €45,000 should not be spending more than €1,000 a month on its rent. It is worth noting that an income of €45,000 is in the upper half of the income distribution, in other words this household is on an above–average income.”
Regarding the rental market Lyons said that there is a growing disconnect between household incomes and prevailing rents. West Dublin, for example, is typically viewed as one of the most affordable parts of the rental market in the capital. The average rent for a three–bedroom house in West Dublin, though, has increased from less than €900 in 2012 to more than €1,300 in early 2016. In other words, it is becoming increasingly difficult, even for those with above–average incomes, to house themselves in or near the capital.
“We know that investors involved in renting out accommodation require a net yield, or annual financial return, of at least 5%. The maths of finance means that once we know this, we can scale up from the monthly rent to construction costs. A monthly rent of €1300 converts into upfront construction cost of €260,000. And this brings up a second and more worrying point about the supply of homes in Ireland.”
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