Peter Burke (Longford-Westmeath, Fine Gael) | Oireachtas source

I will now address amendments No. 21 and 23 to 25, inclusive, tabled by Senators Higgins, Ruane and Black. These amendments are concerned with how, over time, rents will be allowed to rise to a limited extent. The gradual increase in rent, over time, is a fundamental element of the cost-covering model, which is cost rental, as we all know. This model may seem counter-intuitive, but it is an important element. The starting rent for a cost rental home is the end result of a calculation which takes into account the total rent paid over 40 years, including a projected increase in rent in line with consumer inflation, and should meet the projected overall costs of providing the home.

Under the model, the rent paid by tenants should not increase over the long term in real terms, adjusted for inflation. Indexation gives cost rental landlords the confidence to set an appropriately low cost-covering rent at the outset, but it should be remembered that landlords, therefore, take on the risk. The assumption that future consumer inflation, translated into indexing of the rent, will ensure rents cover costs is just that - it is only an assumption based on projections. This level of risk would be higher if cost rental landlords were required to factor in potential reductions in rental income. This could mean significantly higher starting rents, thereby making cost rental far less affordable for tenants on the first day of renting. Whereas in the private rental sector, a landlord may be able to increase rents well in excess of inflation to compensate for years when rents fall. This option is not available to a cost rental landlord who is, quite rightly, restricted by the level of consumer inflation.

Restraining rent increases in line with inflation brings significant benefits, as the years pass, which has been referred to as the maturation of the cost rental sector. This should make cost rental more competitive in relation to market rents over the long term, amplifying the sector’s restraining impact on the wider rental market. The proposal of enforced rent cuts in periods of negative consumer inflation would be problematic for the sustainability of this model. Although downturns in the consumer price index are expected to be rare and temporary, it still introduces a significant risk in that landlords would be forced to lower rents below cost-covering levels. Cutting rents might be fine if landlords were taking a significant profit margin and could, therefore, afford to take a temporary dip, but cost rental is funded and founded upon having a minimal margin, just enough to cover the unavoidable risks and to reassure lenders about loan repayments. The possibility of enforced reductions in rental income will not help attract landlords, such as approved housing bodies, into the new housing sector, nor will it encourage lenders to make loan funding available at sufficiently low interest rates over long periods of time. I alluded to Austria earlier in the debate, which many Members refer to.

I appreciate the thinking that with a period of negative consumer inflation, management and maintenance costs should reduce, allowing the overall rent to be reduced.The costs which could potentially fall, the management overheads and routine maintenance jobs, are projected to be a relatively small share of the overall costs. Repayment of initial capital costs and planned capital expenditure on life cycle works form the majority of the cost base in the first rental projects supported by the Government. In fact, planned works to extend the functional life of homes, such as replacing kitchens, bedrooms, windows, lifts, or even roofs, may well not form the cost base, even if consumer inflation turns negative.

We only have to look at recent history. The consumer price index fell year on year during each month from April 2020 to February 2021, due to the Covid-19 crisis. However, the cost of renovation works on homes has significantly increased in that time due to a complex mix of factors, including Brexit-related supply disruptions and limits to the sector capacity exacerbated by additional lockdown delays.

For the legislation to hold a maximum rent level temporarily flat in periods of negative inflation is one thing, but the possibility of enforced below-cost rents, when money still needs to accrue in sinking funds and cover life cycle works, not to mention the repayment of loans, could only mean one thing, namely, a significantly higher starting rent at the outset to hedge against this uncertainty.

I should also emphasise we are discussing the caps on rent increases. A cost rental landlord is always free to charge below the limit and overall economic conditions may influence this. If market rents fall significantly, reflecting a general economic downturn, a cost rental landlord may need to forestall any rent increase or even offset a slight reduction in order to keep homes occupied and ensure rental income covers costs. Local authorities, approved housing bodies and other landlords will enter the cost rental sector with their eyes open, but they must have some confidence they will not be forced into running deficits.

It is for these reasons we oppose the aforementioned amendments.