Let’s do an Einstein thought experiment on rent rates

The residential rental market is broken but it’s wrong to suggest that the problem is the same across the whole country, writes Colm McCarthy

THE daft.ie report on residential rental costs released last Friday marked the sixth straight year of relentless increases. Rental costs nationally are now one-third higher than they were at the peak of the bubble in 2008. The chief executive of the housing charity Threshold, John-Mark McCafferty, said: “It is abundantly clear that the housing market is broken. Consecutive governments have done little to stop this, leaving families right across the country struggling to keep a roof over their heads.”

It is impossible to disagree with Mr McCafferty’s assertion that the market is broken. But families across the country are not all struggling to the same degree. Rents in large parts of Dublin city are now averaging around €2,000 per month, versus less than half that figure (in some cases only one-third) in most parts of Ireland.

For some curious reason the news media continue to discuss the rental crisis as if it was somehow national, a uniform problem everywhere: RTE TV news last Friday headlined the sizeable annual increases around the country but failed to note the extraordinary disparities in the absolute rent levels.

If a monthly rent of €800 is rising 10pc that is most unwelcome; but a 10pc increase on rental asking prices of €2,000 per month (payable out of post-tax income) is a crisis for Dublin renters.

The daft.ie report shows the highest and lowest average rents as follows: Five highest: Dublin south county €2,058; Dublin south city €2,052; Dublin city centre €1,985; Dublin north city €1,817 and Dublin west county €1,708. Five lowest: Leitrim €557; Donegal €605; Roscommon €642; Longford €655 and Mayo €672.

The counties around the capital have rents from €1,200 to €1,400 while figures in the midlands tend to be in the €800 zone. They have been rising everywhere since the market turned in 2012, faster than house prices, and since the bottom of the recession rents have doubled in Dublin.

Over the same period employment has recovered rapidly throughout the country but wages and salaries have improved far more slowly. As a result, the affordability crisis that has emerged is much more acute in the Dublin area. The portion of earnings required to meet rental costs in and around the capital is exorbitant for more and more workers and it is only a matter of time before the familiar system of roughly uniform salaries and pay rates nationwide becomes unsustainable.

Another inevitable consequence is that pressure continues to build on the various support schemes for those unable to afford private rental accommodation. The Housing Assistance Payment, now the main instrument available to local authorities to address short-term housing need, is differentiated by region: the ceiling for the rent level subsidised under HAP is capped at €1,300 in Dublin but at as little as one-third of that figure in the counties with adequate housing supply. This is the only scheme of social assistance in Ireland where the rate of payment is differentiated on a geographical basis, and the differentiation is severe. Can you imagine the fuss if rates of payment of unemployment assistance were three times the west of Ireland figure in Dublin?

The Simon Community, a charity which assists the homeless, reported during the week that the HAP amounts available are inadequate to meet rising rent levels and argued that the caps should be increased. In an unintentionally revealing response, the Housing Department explained that the caps have already been relaxed and that higher figures are being employed. It is not too hard to guess where the relaxation has been greatest.

What exactly does it mean to say that “...the housing market is broken...”? In a small country with a low population and plentiful land, why should there be such extraordinary disparities in housing affordability across the country? Is it due to some failure of the private market in housing, or in housing finance, the venality of landlords, or the vulture funds, or the rapacious builders?

Last Friday, the Irish Independent columnist Paul Melia concluded that: “The ‘market’ has utterly failed. It’s time for the State to step in and be more ambitious in its response.”

Could it even be that the State, in whose further interventions Mr Melia is willing to express such confidence, has created the crisis? It is helpful at this point to deploy a German notion, the gedankenexperiment, one of those compound nouns that populate the language.

A gedankenexperiment (literally a thought experiment) requires the suspension of disbelief and the pursuit of a fantastical notion to its logical conclusion, as an aid to thinking about some related problem from the real world. Albert Einstein, the renowned physicist, was a fan of the gedankenexperiment and asserted that “Imagination is more important than knowledge.”

Einstein recalled in old age how, when only a boy of 16, he imagined running after a beam of light and reckoned that the thought experiment had played an important role in his development of the theory of special relativity.

Our thought experiment is more prosaic. Imagine that the Government wished to pursue a policy which resulted in cars being three times more expensive in Dublin than they were in Longford. Don’t ask why, just ask how.

There are about 550,000 cars in Dublin at present and about 17,000 in Longford. Prices, new or used, are about the same. The easiest way to drive up Dublin prices would be to require a permit to own a car in Dublin and to restrict the number of permits to a figure well below 550,000. The number of permits in Longford would be left at 17,000 and the price there would not change. Maybe something like 250,000 permits in Dublin would do the trick — the scheme could be phased in through trial and error — you could just keep cutting the number of permits until cars in Dublin cost the desired three times the Longford figure.

If you think that no sane government would do such a thing, you would be mistaken. The government of Singapore operates a scheme along precisely these lines. In addition to heavy purchase taxes, much higher than in Europe, car-owners must acquire a Certificate of Entitlement (COE), required to own and drive a car. They last for roughly the life of a car and are traded in a secondary market. The State restricts the number of COEs and they cost about €20,000. Add all this up and an ordinary saloon car in Singapore, say an Audi A4, costs about three times the retail price in Germany.

The excess price of apartments and houses (and hence of rents) in Dublin derives from essentially the same process, the system of restrictive zoning allied to the routine denial of planning permission for developments on zoned sites. In effect the State has decided that there shall be only a limited number of housing ‘certificates’ in the Dublin area, traded freely on a secondary market at prices that have put tens of thousands on the housing list.

The cost of the HAP scheme will feature alongside over-runs at the Department of Health in future budgets.

There is a straightforward solution to this problem, if the politicians are serious, without calling in Albert Einstein.

‘There is a solution to this problem if the politicians are serious, without calling in Albert Einstein’