At ECA, we continually look at the factors that shape rental prices around the world. Economic growth, recession, and the local political climate have an impact, but in the last year we have also seen what can happen when governments actively intervene in the property market. Two countries – China and Ireland – have introduced legislation to tackle issues in the property market, which has affected rental prices. In China, property cooling measures have led to increases in rents while in Ireland rent controls were introduced to try and control such increases. We have taken a look at these two countries in more detail to see the impact government intervention can have on rents.
China’s property cooling measures
Over the past decade property sales prices in China have sky-rocketed. According to Savills, a global property services provider, residential sales prices in Shenzhen increased by a staggering 923% between 2005 and 2016. The chief cause of the rapid price increases here and in many major Chinese cities is speculative property buying, which occurs when developers and investors buy numerous properties in a certain area in anticipation that prices will increase. This speculative investment has the effect of reducing the supply of available property to an extent that average prices rise significantly. To try and curb this, the government introduced a number of measures, some of which were designed to develop the rental market while others aimed to restrict property investment.
In China, as in many other countries, home-ownership is viewed as an important source of security, which is why very few people choose to rent. China has one of the highest home-ownership rates in the world, at approximately 90%. To try and ease demand on the sales market the government introduced policies to make renting more appealing. For example, in Guangzhou and Shanghai tenants are now able to send their children to nearby schools, whereas previously only the offspring of homeowners could enrol. In Nanjing, rental subsidies were introduced and throughout the country new regulations protecting tenants’ rights were rolled out. As a result, local demand for rental accommodation has increased in many major cities.
The government also introduced policies restricting property investment. In Chongqing, properties can now only be sold at least two years after they have been purchased. In Tianjin, second homes in the downtown area can only be purchased with a local residence permit. Meanwhile, in Beijing, the minimum down-payment for second homes increased to 60% of the property’s value, up from 50%. Despite lowering the number of speculative purchases these policies are not leading to an increase in the number of homes available to rent. The government is trying to increase supply but, because rental yields in China are so low, it is hard to persuade developers to convert to rental accommodation. Rent-only apartment complexes are being built but many are not set for completion until 2020 or later. Thus, while supply will increase, it is not currently meeting demand.
The upshot of these two different policies is a rise in demand for rental accommodation from local nationals, coupled with a restriction in the availability of suitable properties. These changes have prompted an increase in rents, which is what we saw in cities throughout China during our September 2017 Accommodation Survey (in fact, Chongqing, Guangzhou and Shenzhen posted the three highest rental increases of the survey).
Rent controls in Ireland
Over the last few years, rents throughout Ireland have rapidly increased. During the financial crisis, construction and social housing programmes came to an abrupt halt but population growth continued. This led to an acute housing shortage in Ireland and a severe lack of rental accommodation, resulting in rising rents.
© Employment Conditions Abroad 2018
To try and moderate rent increases the government introduced ‘rent pressure zones’ in December 2016. In these zones rents are now only permitted to rise by a maximum of 4% per year. However, despite this legislation, in both our March 2017 and March 2018 Accommodation Surveys rents in Dublin and Cork continued to increase by more than 4%, a trend which is expected to continue. Why is this?
One of the reasons is due to a clause in the legislation that allows landlords to raise rents above the 4% threshold if a property undergoes ‘substantial renovation’. What qualifies as ‘substantial renovation’ has not been specified, so some landlords have used this clause to justify increasing rents above 4% while only carrying out minor renovations. Others have introduced new fees for parking or refuse collection, increasing the overall cost of renting. The legislation has also not been fully enforced and many tenants are reluctant to challenge a rent increase for fear of being evicted.
Perhaps the main reason for the continued increase in rents however is that the legislation does not actually address the cause of the issue. There is still a significant lack of rental accommodation throughout Ireland and this legislation may even exacerbate the problem if landlords choose to leave the sector thinking they can generate more revenue elsewhere. This is an issue commonly found in cities that have introduced rent controls, such as Toronto, San Francisco and Stockholm. In Stockholm, for example, it is common to wait up to eight years to receive a first-hand rental property due to the acute housing shortage there. While they sound good in theory, most economists agree that rent controls have a negative impact in the long term as they lead to a fall in the supply of rental accommodation. If landlords are not receiving market-level rents there is no incentive for them to stay in the sector, so they may decide to sell their properties or convert them to short-term lets. To avoid this occurring in Ireland, the government may be better placed trying to address the cause of the problem, the lack of housing supply, rather than going straight to tackling the symptom of rising rents.
These two examples show that, with the best of intentions, government intervention in the housing market can often lead to rents rising rather than falling or staying steady. In China, property cooling measures to develop the rental market and restrict property investment have led to increases in rents, while in Ireland, rent controls have failed to have their desired effect, with rents continuing to rise. Such changes can have significant repercussions for international assignees, who generally live in rented accommodation. ECA will continue to monitor both markets in our upcoming surveys to see if these trends continue and if any new developments arise.
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