Are increased interest rates behind falling apartment supply?

Analysis: Rent Pressure Zones have been blamed for the fall in apartments here, but international evidence suggests interest rates are the real issue

By Michael Byrne, UCD

The decline in housing supply in 2024 has been the biggest issue in housing politics so far this year. The Government's claim that we would see 40,000 new units turned out to be inaccurate. In response, Taoiseach Micheál Martin has suggested our Rent Pressure Zone (RPZ) regulations are at least partially to blame as they do not create 'a clear, stable environment in which to invest’. This take was bolstered by the fact that construction of Single Family Dwellings and Self Builds remained stable in 2024, with the decline in apartment construction responsible for the overall lower output.

Industry voices have also pointed to the RPZs. In a letter to the Irish Times, Pat Farrell from Irish Institutional Property wrote that "rental prices began to climb again in 2024 in tandem with a marked reduction in new supply, as the impact of the 2% rent caps continued to bite, resulting in institutional investment drying up". In a recent report, estate agents Hooke and McDonald argued that the fall off in apartment supply was ‘directly attributable to the rent cap which is killing supply in the rental market’.

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From RTÉ Radio 1's Morning Ireland, RTÉ Economics and Public Affairs Correspondent David Murphy analyses CSO figures showing the number of apartments granted planning permission down 39% last year

But the evidence of the actual impact of RPZs on the supply of housing is limited. It seems clear that RPZs in their initial version (set at 4%) had no negative impact on supply. However, in 2021 the annual maximum increases was reduced to 2%, or the rate of the Harmonised Consumer Price Index (whichever is the lower). Recent research shows that this tightening is associated with increased exits of landlords, but only for small scale ‘mom and pop’ landlords as opposed to the institutional players who build apartments.

On the other hand, there are plenty of international cases where rent controls of one sort or another have been associated with declining supply of rental properties. What makes this complicated is that some of the best international analyses argue that the impact of rent controls is entirely dependent on how they are designed and the context they are implemented in, making it difficult to estimate their likely impact in the Irish case.

In the Irish case, the key issue is that the RPZ rules were tightened immediately before the interest rate hikes pursued by Central Banks across the advanced economies. Therefore, it is unclear whether or not the tightening of RPZ rules or the interest rate increases are the main factor which have triggered declining supply of rental apartments.

From RTÉ Radio 1's Drivetime, estate agents David Brock and Rob Heaney and People Before Profit TD Richard Boyd Barrett discuss tax breaks for developers, private investment in the housing sector and a review of Rent Pressure Zones

While RPZs have been the focus of most of the debate in Ireland, much of the international evidence suggests that interest rates are the real culprit. If our RPZs are the main factor, we would expect to find that the Build to Rent sector held up much better in other countries over the last few years.

But nothing could be further from the truth. Apartment completions here fell from 12,000 to 9,000 between 2023 and 2024 (virtually all apartments in Ireland are delivered via institutional investors), a 25% decline. Compare this to the world’s largest Build to Rent market, the US. Cushman and Wakefield’s data on US apartment supply shows that "nationally, 560,000 units remain under construction, the lowest level since 2018. Developers are pulling back significantly, with just 230,000 units breaking ground in 2024—on par with 2012 levels and over 30% below the pre-pandemic (2017-2019) average of 330,000. Most forecasters project 2025 deliveries will be roughly half the rate of 2024."

It appears the US has seen a massive decline in Build to Rent investment and construction, much more significant than our own. Crucially, most of the US does not have rent regulation, and even those parts that do have much more liberal regimes than our own RPZs.

From RTÉ Radio 1's Drivetime, number of homes built in 2024 fell by 6.7% compared to 2023

The UK’s housing market is very similar to Ireland, but the one big difference is that it is the most weakly regulated rental sector in Europe. If we want to look at how Build to Rent investment performed in a country which has neither rent regulation nor security of tenure, we need look no further. This report from British Property Federation found that UK BTR units under construction collapsed from over 25,000 units in 2022, to under 10,000 in 2024. A Knight Frank report shows that the picture in London was even worse, with new BTR starts declining to the lowest annual level since 2014. So supply collapsed there too.

The US and the UK are, of course, not in the Eurozone. Although both the Federal Reserve and Bank of England increased interest rates over the same period as the Eurozone, their interest rates were slightly higher. It is therefore instructive to look at some of our European neighbours. Germany is by far Europe’s largest Build to Rent market, as more than half of households are renters. It does have rent regulation, but this regulation is (a) more lenient than Ireland’s and (b) didn’t stop a BTR investment boom when interest rates were low.

Based on Ireland, we would expect German Build to Rent investment to have performed much better than in Ireland over recent years. In fact, the decline in BTR has been of a much greater magnitude in Germany than in Ireland. According to CBRE, in the first half of 2023, ‘the transaction volume in Germany’s investment market for multifamily properties (upward of 50 units) came in at €3.1 billion, marking a decline of 61 percentage points compared with the year-earlier period. The second quarter of 2023 proved to be the weakest quarter on the multifamily property transaction market since 2011’.

From RTÉ Radio 1's Today with Claire Byrne in Sep 2024, Conor O'Connell from the Construction Industry Federation and financial adviser Michael Dowling on why the building of 50,000 apartments has been stalled

This data relates to total investment volumes, rather than investment in new supply. Looking at forward funding transactions (also one of the main forms of funding Build to Rent in Ireland), ‘in the first half-year of 2023, €965 million was allocated to forward funding transactions as against €3.1 billion a year ago. In the second quarter of the year, the investment volume for developments halved again quarter on quarter’.

In short, the evidence suggests that the fall in rental apartment development, which has caused such consternation in Ireland, is an international trend which is not driven by our rent regulations. To be clear, this does not mean that RPZs have had no impact. But it does mean that the evidence supports the argument that interest rate increases were the decisive factor, with RPZs likely playing a smaller role. Other factors have also played a role, in particular construction costs and the planning system.

At the end of this month, the Housing Agency will complete its review of the RPZ system. There will no doubt be intense political debate around potential reforms, as these will impact the 330,000 households who rent privately in Ireland. We also know that market price renters have the worst housing affordability outcomes of any cohort in Ireland. Getting the balance right between protecting affordability while facilitating new supply will be extremely challenging. It is all the more important, therefore, that the debate takes into account the wide range of factors currently holding back apartment supply, rather than hastily attributing all the blame to rent regulation.

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Dr. Michael Byrne is a lecturer at UCD and Director of the Equality Studies M.Sc. He writes The Week In Housing newsletter about Irish housing.

The views expressed here are those of the author and do not represent or reflect the views of RTÉ

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Are increased interest rates behind falling apartment supply in Ireland?

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