POLICY DOCUMENT
Rent Control in the Private Rental Residential Sector
27 June 2014
Background
A form of rent control exists in many countries, including Ireland. According to a 2009 Global
Property Guide report, a form of control on rental increases exists in 40 countries;1 this
number is diminishing as controls are loosened as a response to the threat of investors
leaving the market, and as policy-makers focus on strengthening tenants’ rights above
limiting rental increases. As the European Commission has recently noted in a survey of EU
rental market regulation: “As young cohorts (most often corresponding to lower income
ones…) struggle to enter the property ladder, a well-functioning and affordable rental sector
would provide a viable alternative, cushioning the impact of existing [housing]
constraints….During the build-up phase of a house price boom, affordable rental
opportunities for young/low income cohorts would tame demand pressures and thus limit
price increases.”2 A well-regulated rental sector is, therefore, of particular importance during
a period of turbulent house price change, low supply or economic difficulty.
In general terms, rent controls are most often introduced into the private rental sector to
achieve two goals: to defuse public protest about high rents, and to assist citizens by
providing an agreed framework for contracts, and so avoid post-tenancy litigation.3 In
1
Cruz, C. P. “Investment Analysis; the pros and cons of rent control” Global Property Guide (19
January 2009)
2
Cuerpo,C., Kalantaryan, S., Pontuch, P. “Rental Market Regulation in the European Union”
(European Commission, Economic Papers 515, April 2014)
3
European Central Bank (March 2003)
1
general terms, the European Commission notes that “the regulatory environment in the EU
rental markets generally attempts at setting the right incentives for Landlords and Tenants by
striking a balance between social fairness and economic efficiency.”4 Part of such a
regulatory environment may include limits on the rental increases, rent freezes and
toughening eviction rules.
Globally, three models are open to countries when setting the maximum allowable rent
increase for sitting tenants:

A fixed percentage (e.g. Dubai, Philippines, Pakistan, Tunisia),

A fraction of the construction cost index (e.g. France) or consumer price index or CPI
(e.g. certain cities in the US, Italy, Netherlands, Spain, Switzerland, Colombia,
Uruguay)

A combination of the two (e.g. Canada).
There is thus no one single model, and each has potential difficulties with calculation,
monitoring, fairness of application and flexibility in the context of a diverse rental market
within Irish regions. Even within the EU, a variety of mechanisms exist to assist landlords
and tenants agree a revised rent, including forms of indexation (whether based on housing
costs (Sweden), or a specific figure (20% in a three-year period, Germany)). In most EU
countries, there has been a general agreement that initial rents should be pitched at current
market rates, and allowing only minor negotiation thereafter. Consequently, any rental
increase within the period of a tenancy is determined by a multitude of various mechanisms.
According to the ECB, “In most EU countries, rent adjustment is likely to be closer to the CPI
or some housing cost measure plus or minus some factor that will reflect, among other
things, public housing policy objectives and fiscal policy considerations.”5
The Irish Model
By international standards, Ireland’s rental market is seen a pro-tenant, with a modern
legislative framework and a resourced independent dispute-resolution body.6 The Global
Property Guide comparison of landlord and tenant law notes the “curious system” of the four
4
European Commission (April 2014)
European Central Bank (March 2003)
6
Global Property Guide: “Ireland: Tenant protection laws are significant but not onerous” (6 June
2006). The European Commission, on the other hand, uses a different weighting and puts Ireland in
the pro-landlord group.
5
2
year tenancy cycles and that “It is generally accepted that landlord and tenant law is one of
the most complex and involved fields of Irish law” and the relatively new Residential
Tenancies Act (2004). The Irish model of rent control finds its origins in a cumulative
application of common law and legislation, commencing during the First World War and
culminating in the 2004 Act. Overarching all of this legislation are constitutional provisions
regarding the right of ownership of property and the right to earn a livelihood; the Irish
Supreme Court has been quick to strike down rent control legislation which appears to
undermine landlords’ constitutional rights, particularly where no compensation for landlords
subject to rent control is paid, or where rights of occupation almost permanently alienate the
property from the landlord.7
Views of the Commission on the Private Rented Residential Sector
In 2000, the Commission on the Private Rented Residential Sector, examined the (then)
state of the legislative provisions surrounding the rental sector, and explored rent control
models which would satisfy the requirements of both landlord and tenant, and avoid falling
foul of the Constitution.
The Report of the Commission on the Private Rented Residential Sector (2000) discussed
the concept and workability of a rent control mechanism in the context of a property
affordability problem, and rapidly increasing rents. Where house prices increase faster than
incomes, affordability deteriorates; this has implications for the individuals involved, the
provision of subsidised social housing, rent assistance, and decision-making in household
formation.
According to the Commission, the strongest way to preserve affordability is to make efforts
to “more closely match the supply of housing to demands.” This would mean that the
“operation of the market should bring rents back to more affordable levels, although this
impact would not be felt in the short-term.” To overcome that short-term affordability
problem, the Commission reviewed the principles and consequences of rent control.
Under a proposed model, rent would be fixed at market levels at the start of a tenancy, and
after a specified period, an increase could be applied annually in order to raise the rent to
the prevailing market value. Both the frequency of reviews and the maximum percentage
7
Blake v Attorney General [1982] IR 117
3
increase would be limited by legislation, and the review process would be overseen by an
independent expert body, using market statistics (including consumer price movements,
house-price inflation, interest rates etc.)
A number of difficulties with this rent control model were identified in report:
It was firstly held that by capping return on investment, any form of rent control would
remove investor appetite and would therefore be detrimental to supply.
Second, in a market where rents are expected to rise, initial rents will be front-loaded to
compensate for any subsequent loss on investment before the review period. The report
noted that this would initially inflate rents thereby exacerbating rental increases in a period
where there was a lack of supply.
Third, the report questioned the benefit to tenants of artificially lowering the rent for a defined
period and then allowing it to suddenly rise to market rates at the end of a tenancy. As the
report notes, “this would be a difficulty for tenants whose spending patterns have become
used to reflecting the lower rents” who sought new premises.
It was also noted that, depending on the figures used to calculate market rents during the
period of the tenancy, even in a period where rents may be falling, tenants may be subject to
rental increases.
The report notes that if landlords could not increase rent yields to the level necessary to
obtain a return on investment “it is reasonable to expect that a number would withdraw from
the market and new investment would be deterred.” The report notes that in a period of low
supply, the withdrawal of investment would “be to worsen an existing affordability problem.”
Therefore, the report concludes “that no measures are implemented which would have the
effect of forcing landlords to leaving the market or to seek to maximise their returns on rental
property.”
Current legislative framework
Under the 2004 Act, the parties to a rental contract are free to negotiate rents, but the
amount paid must not exceed the open market rate. The rent may be reviewed and adjusted
to market rates once a year. Rent disputes go to the Private Residential Tenancy Board
4
(PRTB), itself a creature of statute. Security of tenure is determined both by contract law and
statutory provisions which sit alongside each other. If a landlord and tenant agree a contract
of a fixed period, any notice period, and grounds for eviction is set out in the contract. Under
statute, a tenancy is effective for four years; during the first six months, the landlord can
terminate the leasing contract without specifying grounds but once a tenancy has lasted six
months, the landlord can only terminate the tenancy for the next three and a half years citing
just causes.8
Such just causes include:

Tenant has failed to comply with the obligations of the tenancy (Must first be given a
warning and breach continues)

The landlord intends to sell the dwelling within the next 3 months

The dwelling is no longer suited to the needs of the occupying household

The landlord requires the dwelling for their own occupation or that of a family
member (If a member of landlord's family it must state the identity of person and their
relationship to landlord)

Vacant possession is required for substantial refurbishment of the dwelling (Must
specify the nature of the work and if planning permission is required this must be
included)

The landlord intends to change the use of the dwelling.9
.
Impact of Rent Control on Supply
One specific complaint about many forms of rent control is that the system can lack
transparency and predictability; while the Irish model is intended to provide transparency for
both parties, its impact on the future predictability of the wider property market is less easy to
evaluate. In Sweden, for example, where, following the introduction of rent control, of the
approximately 30,000 dwellings completed in 2006, only 36% were intended for rental. In
comparison, from 1990 to 1996 more than 50% of new dwellings completed were intended
for rental. This flight of investment in the most commonly-cited argument for the loosening
(or total abolition) or rent control. Indeed, in 2003, the European Central Bank reported “it is
8
9
Global Property Guide: Ireland (6 June 2006); Threshold “How your landlord may end your tenancy”
Threshold “How a landlord may end your tenancy”
5
likely that the significant fall of real rents has led to significant decreases in the supply of
rental accommodation.”10
The impact of rental control on the supply of property into the rental sector has been
evaluated by the European Commission:
The costs of rent controls outweigh the benefits especially in the case of
transfer models. In theory, tighter rent controls should lead to a decrease in
regulated rents, increasing the attractiveness of renting for tenants, and
thus demand. Moreover, tenants would be better protected against sharp
increases in rents and tenure security would be enhanced11. On the other
hand, reduced rents would shrink the supply of rental accommodation via
its impact on profitability of residential investment for rental use (rental
yields), triggering a downsizing of the rental market12 partially offsetting the
drop in rents and also fostering potential lock-in effects for sitting tenants,
which would hinder mobility.
The specific format of a rental control has also been examined by the EC who conclude:
If rents are regulated only within tenure (tenancy rent control models), the
efficiency losses could be lower, as rents would be freely set for new leases
and allow thus for at least a sluggish adjustment of rents towards their
market level. However, the tensions between landlords and tenants could
be exacerbated as the former would have incentives to increase the
rotation of contracts (for example by encouraging eviction processes, by a
biased tenant selection or through a reduction in the maintenance
investment) while the latter would opt for long duration tenancies as their
fixed costs of moving increase over time.13
Rent controls appear to have a significant destabilizing impact on the aggregate housing
market, increasing the volatility of house prices when confronted with different shocks (e.g.
shifts in population, disposable income, residential investment and long-term interest rates).
10
European Central Bank (March 2003), p. 26
Arnott, R. (1995), "Time for revisionism on rent control?," Journal of Economic Perspectives,
Volume 9,1, pp. 99-120.
12
European Central Bank (2003); Lind, H. (2003). "Rent regulation and new construction: With a
focus on Sweden 1995-2001," Swedish Economic Policy Review, Vol. 10, pp. 135-167.
13
European Commission (2014); Arnott, R. (1995)
11
6
The European Commission note: “Therefore, when setting controls on both rent levels and
rent increases, policymakers should bear in mind their broader implications for housing
market stability and consider them within the context of existing incentives for home
ownership such as taxation incentives (deductibility of interest rates, property taxation vs.
other assets, etc.) or macro-prudential measures (LTV caps, amortization rules for
mortgages, etc.).”
In terms of policy recommendation, European Commission concludes:
The drawbacks of rent controls in terms of unintended consequences for
housing market stability and negative effects on labour mobility would
advise against their use for redistribution purposes. Social concerns such
as the provision of affordable housing opportunities for young and lowincome households and the prevention of homelessness situations require
more targeted policies, which would be welfare-enhancing while not taking
a toll on rental market efficiency.14
Scope of Legislative Reform in Ireland
Since the collapse of the property market in c. 2006 Government policy has been to support
investment from institutional actors in the residential property sector, and to foster the
development of a viable private rental sector to complement home-ownership. As a result,
Ireland has seen a large increase in its rental sector, although it remains modest by
European standards. Again, by European standards, Ireland’s residential rental sector is
largely “amateur” in that the bulk of landlords own one or two properties; they undertake their
landlord duties in addition to normal paid employment. Rent received from those properties
is used, either to pay buy-to-let mortgages or as income supplement.
As noted earlier, the right to own and enjoy the benefits of private property is recognised in
both Articles 40 and 43 of the Constitution of Ireland. Article 40 states that “the State shall, in
particular, by its laws protect as best it may from unjust attack, and in the case of injustice
done, vindicate the life, person, good name, and property rights of every citizen.” Article
43.2.2 notes, however, that while all citizens enjoy the right of “private ownership or the
general right to transfer, bequeath and inherit property” this right may be “delimited by
law…with a view to reconciling their exercise with the exigencies of the common good.” In
14
European Commission (2014)
7
Blake, the Supreme Court held that legislative provisions which limited the ability of landlords
to determine the rent was constituted an unjust attack on the property rights of landlords,
and had failed to reconcile the right to ownership of property with the need of the common
good. They were therefore repugnant to the Constitution and struck down.
Any legislative reform which interferes with the right to own property will be judged against
Articles 40 and 43 of the Constitution and it is likely, therefore, that any legislative reform in
this area will be subject to legal challenge by landlords on the basis that rent control is an
unwarranted infringement of their constitutional rights to own and enjoy property. It is
recognised that high rents constitute a clear and present concern for tenants, and provisions
which are likely to lead to lengthy constitutional challenges in the courts should be avoided in
favour of measures to support the increased investment into the sector, thereby easing
pressures on the sector.
Recommendations
Property Industry Ireland recommends that no further form of rent control is introduced in
Ireland. Given the rights of property ownership which are enshrined in the Constitution, and
the ruling in Blake as well as the opposition to rent control which is evident both from
academic literature and reviews by the EC and ECB, any proposed restrictions on rental
increases in Ireland would need to satisfy an extremely rigorous test. Uncertainty about
future legislation in this area is likely to undermine investment activity into the sector at a
time when it is needed most. It is also likely to have an inflationary impact on rents in the
short-term as landlords seek to impose higher rents in advance of any new form of control.
The 2004 legislation provides a clear regulatory framework in which landlord and tenant
operate, and by international standards, this framework is modern, well-resourced and
enforced. While it is recognised that residential landlord and tenant law is complex, great
efforts have been made by PRTB, Threshold and others to inform tenants of their rights,
both prior to occupation and while in tenancy.
The rapid increase in residential rents seen in some parts of Ireland in recent months is a
consequence of historically low construction of rental property, improved macro-economic
activity and a legacy of weak residential property investment levels, particularly in the
institutional investment sector.
8
Internationally, there has been a gradual erosion of strict limits on rental increases in an
effort to tackle concerns about flights of investment. For Ireland, a limit on return on
investment through rental control poses a real risk to the fledgling institutional investment
market, especially amongst international investors. Ireland’s REIT market has brought
welcome injections of investment capital into the Irish property market, and Ireland’s first
residential-specific REIT has recently begun raising funds. PII believes that many of the
problems facing tenants because of rapid rent increases could be mitigated against through
encouraging further construction and investment in property, and through targeted market
segmentation by, for example, supporting the construction of purpose-built student
accommodation.
Property Industry Ireland believes that as the supply of new property increases, the current
pressure on residential rents will begin to improve. It is important that the regulatory
framework surrounding the private rental sector is put in place for the long-term and that it is
not subject to policy reform merely to mitigate against any temporary problems.
9