The Four Core Problems with the New Rental Rules

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Greenbook

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There is so much going on with the new rental rules, I am have we lost sight of the core problems:

1. There is no market for tenants in situ sales. When you hand over the keys, the value drops by a theoretical 30%. But banks rarely lend for BTL. Lending will be more restricted with the new rules. There is no market for tenant in situ properties because a seller will be confined to other cash landlords. These will be rare. Rural properties, in particular, will be completely unsaleable.

2. If your rent is well below market value due to the RPZs, you've no choice but to sell because the rent can never increase beyond a maximum of 2% if the tenant stays. As costs increase and the property needs work, you'll eventually have a liability on your hands.

3. The world's strictest rent controls are largely still in place making the PRS unattractive. It looks as if a second set of rent controls will apply for between tenancy and year 6 increases. This seems to be some type of reference rent system policed by the RTB

4. The combination of the old rules and the new rules means that the system is incredibly complex and full of traps, unintended consequences and counterintuitive results. Worse, if you inadvertently miss something or don't fill in a form properly, you're likely to face criminal prosecution and a criminal record.

These, I think anyway, are the core problems and make the whole thing unworkable for landlords. There are many other problems as well, but those are just noise.
 
There's no tenants in situ market. So if you can't sell, value goes down.
Currently, when your rent is below market, your potential buyers can only be owner occupiers or future LLs who accept to leave the property empty for 2 years. This once again can have an impact on the value of the property.
 
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Due to the limited market for tenant in situ sales, the IPAV have said that the drop in market value is in or around 30%. You're confined to other investors. The much bigger market is owner occupiers. Hence the sale price drop.

You have a long-term tenant in situ family in a three bed semi in Charleville, County Cork. You can only sell to another landlord with cash to purchase. These are small in number anyway and a rental in a small country town will have very limited appeal.
 
Greenbook said:
The world's strictest rent controls are largely still in place making the PRS unattractive. It looks as if a second set of rent controls will apply for between tenancy and year 6 increases. This seems to be some type of reference rent system policed by the RTB
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The more I read about this, the more it seems to make a mockery of the idea of market rates. Between a reference system to a break of market rates if market rates increase too quickly... To no market rates if the tenancy ends up to quickly (on this one, I wonder what should happen, say if the first tenancy goes on for 2 years, will the LLs have to wait 8 years to be able to put up the rate to market rate?)
My understanding is that the 2 later are only propositions put forward.
 
I can see the BTL lending market being massively curtailed by these rules (as if it wasn’t bad enough already). If I were a banker I would be seriously concerned about the ability to repossess and sell with vacant possession under the new rules. There seems to be a hardship clause for selling due to the bankruptcy of the owner, but - as with everything else in this bill - the details are absent and it’s unclear what would happen if the repossession was just negotiated with the banks outside of a bankruptcy situation. Will they have to force a bankruptcy to get vacant possession to sell? If they can’t get vacant possession and the value is impacted will they seek to have a much higher deposit upfront to make up for the impact on value of having to sell with tenants in situ?
 
JoeRoberts said:
The price for a sale with tenants in situ will now be based on the present value of the expected future cash flows rather than open market value.
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So you have to push the rent as high as possible to maintain a reasonable selling price. This is completely the opposite to what the government want- lots of reasonably priced rentals. In any event, the annual rent control system and the new tenancies/year 6 rent control system will prevent you from achieving that.
 
Dont forget the RTBs reference rates will be based the restricted rents held with them, so when you are reseting to market rents you will not actually be able to charge market rent, because the market rent will be given to you by the RTB, which of course is based on the restricted rents already in the database. That will then carry forward, bringing down rents as we go.
Also if any thinks they will be able to sell to an owner occupier, they wont be able to because no owner occupier is going to buy a property with a tenant in it. They will never get to live in the property they are buying. So banks will not lend for that scenario anyway.
 
Premos said:
There's no tenants in situ market. So if you can't sell, value go done.
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The irony is that this is because of the rent price controls.

A property with in-situ tenants would be perfectly saleable if the rent was market rent. In fact, an investor would be happy with not having to deal with getting a tenant themselves.

An investor will pay for a property based on the percentage of market rent they can get for it. A 400k property with 75% of market rent is effectively a 300k property.

Fundamentally, the problem is that selling to an owner occupier is the only current way to clear the rental limits. Owner occupiers don't pay rent to themselves.

They could have security of tenure rules if they allowed market rent. Below market controlled rents mean that tenants are unlikely to voluntary leave. This causes landlords to want a way to easily restore vacant possession. It's not strictly vacant possession that is wanted, it is some mechanism that they can exit the market without having to leave a chunk of their property value behind.

If selling with in-situ tenants got them market value for their property, there would be a lot less objections.
 
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JoeRoberts said:
The price for a sale with tenants in situ will now be based on the present value of the expected future cash flows rather than open market value. This difference is the discount.
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This just shows how crazy current valuations are.
 
Given how hard it is to get rid of a tenant the new system will incentivise tenants to behave badly and not pay their rent so that the sale of the property to the tenant at that discounted rate becomes the least worst option.

Demand side restrictions never fix a supply side issue.
 
Purple said:
the new system will incentivise tenants to behave badly and not pay their rent
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Not paying the rent is one of the allowable reasons to evict.

Behaving badly is less clear cut, depending on what they are doing.

Tenants on below market rental would be well advised to make sure to pay their rent on time. There is no point in giving the landlord a valid reason to evict.

There is less reason to pay once a notice of termination is actually issued. Once the tenant is within around 60 days of the move out date, they may be able to get away without paying the rent.

The landlord would need to give them 28 days to pay the rent and then another 28 days for the notice of termination. By then the original notice period would have expired anyway.
 
And you can bet it is the small owners who will be prosecuted, they will be easy marks and boost the profile of the RTB

The big guys will have layers of lawyers to protect them if anything goes wrong. They can afford to challenge the RTB in the High Court, if necessary. The RTB will avoid them for that reason.
 
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