October 17, 2005

Spar Generation strikes back

Posted in Celtic Tiger ·

Walk into any Spar today and you will see them.

They are buying breakfast rolls, working behind the hot food counter or just picking up 20 Blue after work. They are Ireland’s dynamo – the Spar Generation. These are the people who will keep the entire edifice together.

As more data emerge revealing that (a) the construction industry is operating at full tilt and (b) we are still ploughing money into the buy-to-let market all over the country, the moves of the Spar generation are now more crucial than ever.

Think about it – 242,000 people work in construction. That is over 11 per cent of the workforce. And 84 cent of every �1 borrowed goes into property. Never before has the prosperity of so many been in the hands of so few.

The Spar generation are the people who keep the inflated Irish rental market buoyant. Whether they are young foreign employees or local twenty something customers grabbing something on the way home, they have one thing in common – they rent.

Given that hot food sales at convenience shops have increased by over 36 per cent in the past year and that this figure captures the habits of young renters more than most, if you want to see the future of the Irish rental market, go no further than your local Spar.

For those of you preferring a slightly more scientific approach, the latest numbers confuse, rather than clarify, the picture. The recently-published www.daft.ie report, the most comprehensive on the rental market, indicates that the Spar generation has helped the Irish rental market to stabilise following two years of decline.

This is bad news if you are about to rent a place but good news if you have just bought a gaff. Well, actually goodish, rather than unambiguously good, because, while the falls in rents of 2003 and 2004 have plateaued, house and apartment prices continue to rise faster than rental income, which implies that residential yields continue to fall.

Luckily, the interest rate cushion is still soft and feathery and there is little or no sign of euro interest rates rising for the foreseeable future. But, given that the market has only just stabilised and increased future supply will only be taken up if all the underlying factors remain supportive, any change to the rate environment could tip this finely-balanced market over.

So what are investors and landlords to make of the big picture? If you are buying today to generate an income from renting residential property, you have missed the boat. However, as the banks are lending hand over fist to the market, you can still make a few quid by avoiding being Paddy Last. That’s the rule.

As we continue to buy property as if it is going out of fashion, everyone’s exit strategy in this inflated market is to make sure there is another investor behind you to whom you can flog. So make sure you are not that guy. Always keep the exit doors open.

If you are not thinking of selling, but are concerned about managing your income flow, then data on the length of time to let and average vacancies are crucial.

Anyone, from the largest player with a substantial portfolio to the amateur investor with one buy-to-let property, can deal with lower but stable monthly rent.

In contrast, prolonged vacancies can throw even the best-laid financial plans off course. On average in Dublin city and county, it is taking 16.4 days to rent your place. Properties in Dublin 1 are moving most quickly – typically just over two weeks on the market. On the other hand, if you have a place in the commuter belt, you are looking at three weeks to shift it.

Properties in the city centre are on average remaining vacant for 8.6 days, while out in the commuter areas, places are empty for the guts of a fortnight. The average vacancy period for the city is 9.6 days.

So, taken together with the average time to let, an investor should probably at best be calculating income on an 11-month calendar.

What about our renters – the Spar Generation? The message to you is: don’t panic. Rents have firmed, but only slightly, and there seems little likelihood of rents moving upwards rapidly. In Dublin, the average rent is �1,164,whileCork rents remained largely unchanged over the past two years. In Galway, bar the normal cyclical increase in rents in early summer, rents are lower than they were a year and a half ago.

In terms of the type of property, it is getting more expensive to rent four-bedroomed houses in Dublin. This may reflect a number of factors.

First, there is increasing evidence of a change in our immigration patterns, with more families, particularly from central Europe, arriving.

Secondly, while the supply of apartments has increased apace, there have been relatively few bigger houses built over the past two years. Where houses have been built, many have been second homes, which are vacant during the year and not on the market.

Three and four-bedroom houses apart, decent supply is the main factor keeping rents down. So the message to the Spar Generation in Dublin is not to panic, because market dynamics are on your side and there are plenty of properties out there. So shop around.

In Cork, the picture on bigger houses is broadly similar, but the market is tighter, with time to let and vacancy rates falling. Rents for houses in Galway have recovered steadily in recent months, but are still off their 2003 highs. In Limerick, rents – particularly in three and four-beds – are still soft. These broad trends are mirrored all over the country.

An interesting dichotomy has emerged recently at opposite ends of the Dart line in Dublin. Rents in Howth have risen 13.4 per cent, while the bottom has fallen out of similarly fashionable Dalkey, with rents falling in the seaside town by over 4 per cent in the second quarter over the first. Now could be a cheap time to move to Dublin’s swankiest suburb.

Specific market and financial concerns aside, the most important factor driving rents over the next year will be the immigrants in the Spar Generation.

They are the people who will generate extra demand, and it is the extra demand – rather than the expected demand – that will determine the direction of rents in the future.

Immigration is driven by push and pull factors. The push factors driving young people out of central Europe in particular will continue, as their economies fail to generate sufficient opportunities.

Where the economies are growing – as in Poland and the Baltics – they are not creating sufficient jobs, so a significant proportion of the young labour will emigrate. In terms of the pull factors, Dublin was this year ranked in an international survey as the easiest place in Europe to get a job. So, with the economy set to grow by 5 per cent, job opportunities will be plentiful.

However, recent evidence that productivity might be falling here should flash an amber light regarding job creation in the future. It’s a bit too early to tell, but the rate of job creation for the Spar generation will depend on their productivity.

In the short term, as long as interest rates stay low, alarms from productivity figures will have little impact on the construction frenzy. This is not to say that there is value in the housing market – clearly there is not – but cheap money and profligate bank lending should preserve the �good times’ for awhile longer.

If you are in the market, the best place to see its dynamics is either in the cheap discount phone shops dotted all over the city, an internet cafe or your local Spar, particularly at the hot food counter – the Spar generation’s pantry.

Here, with their takeaway lasagne, prepaid mobiles, Hotmail addresses and MSN chatrooms, is where the market exchanges information, places deposits and snaps up bedrooms in shared houses.

Next time you are worried about the direction of the market (which will probably be tomorrow, given the divergent signals),drop into a discount phone shop and then go around the corner to Spar.

If both are packed and busy, forget most of the high-falutin’ economic commentary; feel the energy, drive and rental capacity of the Spar generation and make your own calculations.

  1. Harry

    A quote from the article entitled “Building Boom Represents
    a Pyramid Scheme” by Jim O’Leary in the Irish Times on
    Friday the 14th of Oct.

    “I get worried when confronted with circular causation. I am
    especially worried about the circular causation implicit in
    this proposition. What it amounts to is as follows: the pace
    of construction activity is so hot that we need immigrant
    construction workers in increasing numbers. Our need for
    increasing numbers of construction workers means that we
    need even more houses than we would otherwise. This means
    the pace of construction activity must accelerate further,
    which means in turn we need even greater numbers of
    immigrant construction workers, and so on.

    This has at least some of the hallmarks of a pyramid scheme,
    a pyramid scheme on a truly enormous scale, and that is not
    a comforting thought.”

    The full article can be found at:

  2. william

    Dear David,

    If 11% of the workforce work is in the construction
    industry, and are undoubtedly earning excessive wages and
    as you say are the generation who have helped stabilise the
    rental market. Where is the incentive in the future for
    young boys to go onto to third level instead of finishing
    their leaving cert. and jumping on this band wagon?

  3. Ian

    I think it’s the economics of the Spar Generation that has
    done for the Irish football team.

    Soccer was a great escape avenue for working class boys in
    the past. There seem to be far fewer Irish players playing
    professional soccer in England now. Why put all that effort
    and training into trying to break into playing for Crewe
    Alexandra, when you can earn a thousand a week, drink with
    your mates, and live with your girlfriend, at home in Dublin?

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