I thank the committee for allowing us to make our presentation. The private rental sector is a vital part of the housing market in Ireland. More than 500,000 tenants are catered for in the market and it is crucial that the rights and obligations of both owners and tenants are fully respected in legislation. Unfortunately, that is not the case. Inthe past few years much legislation has been enacted which has had, and will have, serious implications for the private rental sector. Some operational aspects will have devastating effects on individual investors and the future supply of affordable rental accommodation.
I ask the committee to give some thought to the difficulties faced by property owners in the private rental sector. Investors were encouraged by the Government to put measures in place to look after themselves when they retire. They entered the private rental market for long-term investment, purchasing properties on which they paid up to 9% stamp duty, and provided good quality homes to 500,000 people. These are long-term investors, not speculators — their intention was to purchase property to provide for their future and that of their families. When investing, investors factored the possibility that mortgage interest rates might increase together with periods of vacancy and routine maintenance costs, being aware that rents can go down as well as up, unlike in the current commercial rental sector.
Some 20% of all mortgagees are on tracker mortgages and are in the lucky position that the decrease in rental income was accompanied by a decrease in their mortgage payments. Unfortunately, 80% of mortgagees are not in the same position: those with fixed-term mortgages had no reductions and variable rates decreased slightly. Unfortunately, the banks did not pass on the full reductions in the ECB rates to buy-to-let investors and in some cases actually increased them, resulting in their mortgage becoming more expensive, while rental income has significantly decreased.
As a result of the decline in the sales market, developers who cannot sell their properties are being forced by their financial institutions to rent them in the short term. This has resulted in a flooding of the market, increasing the supply of property available to let and reducing rents. These developers are not long-term investors and will sell as soon as the market improves and consequently the properties should not be considered long-term rental properties. Short-term properties are new and well designed and when tenants move into them they may have left the traditional long-term investor. In time, this may see the long-term investor moving from the market and may create a shortage of supply. This move should be discouraged before serious harm is caused to the traditional stock of rental accommodation.
Most buy-to-let investors who have purchased property since 2004 are now in negative equity. They cannot sell because the properties are worth less than the amounts they borrowed. This becomes a real problem when they cannot meet their repayments. Buy-to-let investors in this section had equity in their homes and were encouraged by financial institutions with the offer of maximum loan facilities to release the equity in order to purchase a second home.
Unfortunately, as a result of the difficulties in the economy as a whole, a buy-to-let investor also has to deal with other issues, such as redundancy, reduction in income and unemployment. This limits the amount he or she has available to subsidise rental income. Market forces have resulted in an oversupply of property for rent, long vacant periods, reduced rents, reduced income generally and negative equity, which are unavoidable problems. If investors had only these matters to deal with, they would weather the storm. Unfortunately, some investors will lose their properties anyway. Rental income is insufficient to cover their mortgage interest payments, which is a sad position, but it is part of the cycle of investment for the long-term buy-to-let investor.
Government intervention in the private rented sector has been anything but helpful. An example of this is the botched introduction of legislation in 1996 for the registration of properties with local authorities, which was unworkable. The commission on rental income in 1999 outlined a number of fiscal measures for the private rented sector, but when the subsequent legislation came into place, these measures were nowhere to be seen. The Residential Tenancies Act 2004 is a very complex piece of legislation which has compelled landlords to register tenancies with the Private Residential Tenancies Board, but the main part of the Act, that is, the dispute resolution mechanism, is in total disarray and costs landlords thousands of euro in lost rent.
In one case, a landlord pursued a tenant for non-payment of rent. The proper course of action was followed. By the time the dispute resolution process was completed through the tribunal, the tenant owed €12,500 in unpaid rent. This was enforced through the courts and the decision given by the judge was that the rent was outstanding but allowed the tenant to pay €100 per month, which meant it would take ten years to repay the money. As in many other cases, it is highly unlikely that the landlord will ever be paid. This is one of the many cases which costs landlords hundreds of thousands of euro per year.
In July 2008 the interest relief allowable on moneys borrowed for refurbishment was abolished. This was a serious blow because only the interest on the moneys borrowed was allowed to be offset and this was to encourage property owners to refurbish properties and keep them up to date. Property needs to be modernised and the withdrawal of refurbishment relief will be detrimental to the market.
The EU directive on energy efficiency was introduced in January 2009. Properties rented from that date have to have a building energy rating certificate which costs approximately €300 per unit. Energy efficiency is very important in today's climate and older properties need to be upgraded to make them more energy efficient. Any improvement in the efficiency of property will benefit tenants and not property owners, but there is no incentive to the property owner to upgrade the energy efficiency of the property. If such tax relief was available, it would encourage property owners to upgrade properties, which would benefit tenants, create employment and reduce CO2 emissions. The importance of this is evident in the United Kingdom, where allowances of £1,500 for upgrading the energy efficiency of properties are given to landlords.
New standards for rented accommodation were introduced in February this year which involved additional costs to property owners in the private rented sector. Pre-1963 properties, multiple unit properties and the older stock of properties will be particularly hard hit, with many owners in negative equity and unable to access funds from the banks. Refurbishment relief has been abolished and many of these properties may fall into disrepair. Owners cannot sell or afford to refurbish them. There are approximately 20,000 pre-1963 properties, housing in excess of 100,000 tenants, which provide affordable accommodation.
From 2013 it will be illegal for these property owners to continue renting their properties. The estimated cost of refurbishment per unit in pre-1963 properties is €10,000 to €15,000, with refurbishment of common areas costing approximately €25,000. There will be a loss in rents as a result of the reduction in the number of units and a loss of rent during the process of refurbishment.
Landlords also have the problem that banks are not lending due to the current financial situation. A landlord will have to terminate the tenancies which some residents have lived in for ten years or more, which will be a very difficult situation for them to deal with. Sourcing accommodation for similar properties will be impossible, which will undoubtedly result in homelessness and the stock of affordable accommodation will dwindle.
The recent budget measures have affected everyone negatively but have affected landlords in particular. They have been targeted more than any other sector. This is particularly unfair because landlords, in purchasing property, pay stamp duty at the commencement of the investment, often borrow money in order to pay the additional tax and contribute large amounts in taxation annually. Income levies of between 2% and 6% were introduced. While buy-to-let investors do not accept the necessity for them, they are fair because they are targeted at every business on the basis of the profit on an investment. These levies target profit, after allowing for expenses.
The reduction in mortgage interest relief to 75% is a very severe blow. Investment was based on the full mortgage interest being offset against rental income. Instead, buy-to-let investors are paying tax on an expense. They have to pay the full 100% of mortgage interest to the banks. This cut needs to be reversed. Prudent investments were predicated on the knowledge that tax legislation never introduced a retrospective law.
When the supplement was introduced across the board, even though property owners had already reduced rents, breaching contracts and the Residential Tenancies Act 2004, it artificially forced down rents and is a testament to rent control. Rent supplement should be paid directly to the property owner on behalf of the tenant, which would reduce fraud and the amount of cases being brought to the Private Residential Tenancies Board for non-payment of rent. Adopting this method of payment will ensure continuity of residence.
Investors were again targeted with increases in capital acquisitions tax and capital gains tax by a staggering 20%. This tax will not be evident until the disposal of property by sale or transfer. It is a heavy burden to put on an investor who is disposing of property and, in particular, on family members. The Local Government (Charges) Act 2009 was recently enacted and directly targeted property owners in the private rented sector, with investors paying €200 per dwelling even if they are in a loss-making situation or cannot let their properties. Ability to pay was not taken into account. Pre-1963 property owners are struggling with the charge. It is unacceptable that they have to pay per bedsit or unit. Recent investors with high mortgages cannot afford this payment. A house comprising six bedsits incurs a cost of €1,200 but in a house next door shared by six tenants the cost is €200.
Some investors may be in negative equity and the rental income may not cover mortgage interest payments. The cost of this to a property owner can be €200 to €2,000 per unit and above. This needs to be changed and a maximum cap of €400 for a house with two or more units should be introduced. The question of whether property owners pay the charges in order to be law-abiding or refuse to pay insurance premiums has been widely asked.
It is also unfair that payment of the charge is due in March 2010 which, in effect, means property owners have to pay it twice in the one year. No service is being provided for the charge. We have been advised that we cannot offset this tax against expenses, which has the effect of doubling the cost to property owners. It should be allowed to be an expense.