To what extent is government policy propping up the private rental market?

Take a look at what rent allowance you can receive from the Irish State – a single person can get €94 per week or €407 per month (4.33 weeks in an average month) for the counties Longford, Westmeath, Laois and Offaly for example. And if you were to look at DAFT right now for Offaly and 1-bedroom apartments you would see 8 results which range in price from €350 to €560 per month – €500 would appear to get you a well furnished and decorated apartment. These are asking prices on DAFT and even in the present market where some Dublin City Centre apartments are showing signs of rent rises, discounts of 8% are well-achievable.

So take 8% off a €500 rent and you have €460 per month versus a rent allowance of €407. To this author it is very difficult not to conclude that rental prices are being propped up by government.

UPDATE: March 16th, 2010. Labour TD Joan Bruton tabled a question in the Dail asking about the government’s plans for the  level of rental supplement. Her question (search for 5546/10) from 3rd February, 2010 can be seen here and in brief the response from Deputy Hanafin was that the allowance was the subject of a report in March 2010 and that the use of the allowance to distort the marketplace would not be permitted with an implication that the present level of rent supplment may be at risk.

UPDATE: 5th September, 2010. The Sunday Tribune reports that Friends First economist and FG councillor Kieran Dennison claim that the €500m being spenteach year is in fact propping up and distorting the rental market.

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Are property prices being artificially propped up (revisited)

Let me quote you a paragraph from Fintan O’Toole’s excellent book “Ship of Fools”

The main reason for this [the runaway property inflation between 1994 and 2007] was the price of building land, which in turn was heavily influenced by what the Oireachtas All-Party Committee on the Constitution referred to as the fact that ” certain landowners had accumulated large landbanks at the outskirts of urban areas which they then released in dribs and drabs in order to manipulate the market and artificially to maintain high land prices”. Essentially a small number of very wealthy land speculators was able to shape the market in such a way as to ensure that the cost of buying the land it stood on made up a larger and larger proportion of the cost of a house”

If the Oireachtas Committee is correct (seems like a good enough judge of fact to me), then might such market manipulation be possible, nay probable, again? Could the social altruism of banks restructuring mortgages on 30,000 properties, the overhang of 300,000 vacant properties, the unsustainable lending margins of Irish banks (now at about 1% compared to 3.5% a few years ago), the lack of recovery actions by the banks on big developers (there have been some but compared to the size of the loans, it’s but a drop in the ocean) – with all of this could we be seeing a manipulation of the market ahead of NAMA’s point of no return?

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