Tom Dunne PII Seminar June 28 2012

1. Tom DunnePII Seminar June 28 2012

2. Housing is Changing • Housing has been changed by the economic crisis • Post crisis, should not assume that the sector will reset to pre-crisis culture/structure • There may be a structural shift • If so, the institutional & tax frameworks underpinning housing will need to change

3. Housing in Ireland before 2003 Social (+) 9% New Stock Traded Private Rented 10% Owner Occupied 80%+

4. Housing in Ireland now Social(+) 11.5% New Stock Traded Private Rented 18.5% Owner Occupied 70%

5. The Past • Up to 1930s private rented sector dominated • After Depression/WW2 tenure patterns changed • Rented sector -contracted • Home–ownership -expanded • Social Rented -expanded • Now H-O is the dominant tenure in most countries • & overwhelming majority in many

7. 2007 (Source Social housing in Europe Whitehead& Scanlon LSE 2007)

8. Why? ..........many reasons suggested • Belief • Rising home-ownership = a better society • Underlying preference for home-ownership • Instinctive resistance to renting • Influenced public policy • Particularly tax policy • Modified the balance of costs and benefits attached to different tenures • Governments incentivised owner-occupation

9. Supported by • Access to finance • made possible by “deeper” financial systems • Increasing employment and income security • Experience of residential markets • The value of mortgage debt seen to be eroded by rising incomes & inflation • Volatile (boom & bust) residential markets encouraged buying to avoid higher prices tomorrow. The housing ladder

11. A home without equity is just a rental with debt Joshua Rosner 2001 • Income & employment insecurity • Increased labour mobility especially at early career • Lenders return to stricter lending regimes • Illiquid property markets - Can’t sell Can’t move • Home owners are less mobile than renters • Our thinking about property is changing…….

12. Issues now raised about incentivising Owner-Occupation • Effect on macro-economy • Need to consider effects of volatile housing markets • Has owner occupancy been pushed too far? • Over investment in housing • Crowding out other investment • Adverse effect on entrepreneurship • Mortgage finance a problem...... again • as it was in the past

13. What’s the appropriate balance? • Stated government policy now tenure neutral • State cannot afford /is unwilling to supply & manage social housing directly • There is a real shift to private renting but is it a fundamental shift?

14. Likely Outcome • Govt will modify balance of costs and benefits attached to different tenures • & look to private sector for social housing solutions • People will be less incentivised to buy • More will rent

15. Housing in the future? Stock Traded Social(+) 8% New Private Rented 22% Owner Occupied < 70%

16. Private Rental Sector • Now 305,377 households (Census 2011) • 18.5% • 32% in Dublin • Concerns emerging • Withdrawal of existing BTL landlords • & finding landlords to replace them • if people are to be able to rent from landlords • Rental property will have to be financed • But how? • And who would be a residential landlord?

17. Landlords in the PRS • Professional individual landlords • Significant % of their income • Small numbers • Access to additional finance problematical • Resident Landlords • Accidental /circumstantial landlords • Developers letting for short term • Vendors holding off market • Those who Bought to Let (BTL)

18. Non commercial landlords • Are the vast majority • From PRTB • No. of registrations 231,818 • No. of Landlords 145,021 • Less than 1.25% of Landlords own 10 or more properties (NPPR) much less than 2000 • Other • Commercial Property Investment Companies in the private sector very small numbers • Approved Housing Bodies in the voluntary sector

19. BTL loans not in good shape • Outstanding BTL Loans 82,600? • 1994-2003 about 6% of all loans • 2004-2008 this rose to 17% • Average balance on BTL Loans €244,000(CBI) • Arrears about twice what it is for owner-occupied property. • Many will want to pull out of the market • Or be forced out

20. A Growing PRS • Even if PRS moves to back to long term norm of say 15% households who want to rent • There will be a challenge if many existing BTL landlords exit • But • Moving from 18.5% to 22%? In the PRS • c.30% of housing stock rented • Closer to normal for developed economies • 50,000 + extra properties to be funded • A lot of money required €10bn

21. The Future of the Rental Sector • An increase in households wanting to rent likely • (Or having to rent ) • (SWA+ Long term renting of social housing e.g. RAS scheme) • But rent from whom? • Probably not many non commercial landlords • Who will not be able to finance BTL • And their offering has inadequacies • from the perspective of a long term renter • Better if provided by Commercial Residential Landlords

22. Commercial Property Investors • Buy residential properties for rental • long term perspective • Assemble portfolios of residential property • Which they can professionally manage • Ideally entire apartment blocks • Example - Kennedy Wilson • Alliance Building Dublin • Others are looking

23. Commercial Residential Landlords • Professionally managed organisations • Not speculative -Seek income • Not likely to buy scattered individual units • Prefer to invest in Blocks • to reduce management expenses & risks • Say 30 + units as a minimum • Provide ancillary services • Funded by equity finance + • Could be financed by pension funds • Could be REITs • Have no issue with good regulation

24. SourceIPPR

25. Residential Tenancies Act 2004 • Amended the law for residential tenancies • Basic scheme • Balanced rights of Landlords & Tenants • Recognised & provided for types of Landlords then in the market • Designed for residential market dominated by Owner Occupation(sell with vacant possession) • Accommodates “Corporate Landlords” but not designed for them

26. Residential Tenancies Act 2004 • Amendments needed to reflect what should become a differentiated /two tier market • Non Commercial landlords • Existing regime applies • Allow landlords with more than say 10 units • To register as commercial landlords rather than registering tenancies • This should be done for Approved Housing Bodies also • Give their tenants greater security of tenure • Revise Part 4 tenancy arrangement

27. Measures that might encourage investment by CRLs • Assistance needed to buy blocks & assemble appropriate lot sizes • Often where some units have been sold already to owner occupiers • Give powers of Compulsory Acquisition • Where management charges are in arrears • From owner-occupiers at market price +25% • Of mortgages secured on apartments in blocks they own

28. To summariseThe likely future of housing • People defer buying to later in life • A larger Private Rental Sector • Could be 50,000 units provided by Commercial Residential Landlords • But we need to facilitate /foster the development of these organisations • Could be funded by equity and pension funds • Give tax relief on pension contributions invested in regulated CRLs • Better managed rental sector

29. Thanks