There is much to consider in the economics of the Buy To Let industry in the UK which covers those who buy houses to let them out to tenants. Let us get straight to the numbers released this morning by Your Move and ReedRains.
Rental yields are proving resistant to rising purchase prices. The gross yield on a typical rental property in England and Wales (before taking into account factors such as void periods) is steady at 4.8% in February, the same as in January 2016. On an annual basis, this is fractionally lower than the 5.0% gross yield seen a year ago in February 2015.
As mentioned in the piece there is the risk of void periods where you have not tenants and these are gross yields with no allowance for costs. But let me give you a comparison which is that in a low yield world the UK ten-year Gilt will give you 1.46% as I type this which is pretty much the same as the best deposit savings account. If we look back the rental yield has been remarkably stable over the credit crunch period at around 5% which means that it has become ever more attractive as competing yields have fallen.
Thus we note that the business model of a rentier has been a beneficiary of the interest-rate cuts,Quantitative Easing and Funding for Lending Scheme of the Bank of England. Other yields have been pushed lower making it more attractive as it joins shale oil and the economics of the Glazers at Manchester United as unexpected beneficiaries of central banking largesse.
If we continue with the numbers we note that the UK continues to have rising house prices so that there is a gain from this too.
Taking into account both rental income and capital growth, the average landlord in England and Wales has seen total returns of 12.7% over the twelve months to February. This is up from 11.7% in the twelve months to January
Okay and what does that mean in total?
In absolute terms this means that the average landlord in England and Wales has seen a return of £23,227 over the last twelve months, before any deductions such as property maintenance and mortgage payments. Of this, the average capital gain contributed £14,767 while rental income made up £8,460 over the twelve months to February.
Let me reinforce that these are gross numbers which do not allow for costs but as you can see they look very attractive. Now let me throw in the risk element which is supported by the view that it is low risk because economic policy in the UK will always be set for house prices along the lines of Yazz.
The only way is up, baby
For you and me now
The only way is up, baby
For you and me
The Bank of England
This has fed this in various ways and let me illustrate from the Bank of England blog.
The period surrounding the recent Great Recession saw a sharp decline in real house prices in the UK: they fell by about 20% over the period from 2007Q3 to 2009Q2.
Well let me introduce you to the Mervyn King put option for house prices which involved this. Firstly interest-rates were cut to 0.5% in March 2009 which is interesting timing when you look at the above. That same month in 2009 QE began in the UK to reduce bond yields ( think mortgage rates) as monetary policy saw the pedal pushed towards the metal just as the house price fall built up.
You see monetary policy may not be set for house prices but if we raise the level of sophistication central bankers do think this.
the estimation provides strong evidence on the causal link between housing shocks and the macroeconomy during the recent crisis……it is essential to better understand the drivers of the striking comovement between house prices and labour markets in the UK.
It is an oversimplification to say that house prices fix unemployment but you get the idea and this leads us to the view that it will always be official policy to prevent large house price falls. You do not have to believe that the rentiers are protecting themselves although of course it is likely that there are elements of that as in the end they believe it is linked to employment and unemployment to which they will respond.
Also the low risk theme is reinforced by this sort of thing. From Mortgage Strategy.
Tony and Cherie Blair’s property empire is worth £27m, according to research by the Guardian.The couple now own at least 10 houses and 27 flats.
Cherie apparently does not like change which affects her.
Last month Mortgage Strategy reported that Cherie Blair was set to challenge the Government’s buy-to-let tax relief changes in court, arguing it breaches human rights.
A human right to large profits?
The costs of a buy to let have fallen in the credit crunch era as monetary policy has driven them lower. The Council of Mortgage Lenders gave us some insight yesterday.
Our estimate is that gross mortgage lending was £17.6 billion in January, nearly a third higher than a year ago……………The inescapable fact is that part of this recovery in activity and transactions has been down to the strong pick-up in the buy-to-let sector,
From Mortgage Strategy.
Barclays is cutting rates on its residential and buy-to-let product ranges by up to 30 basis points…….Paragon Mortgages now accepts applications for consumer buy-to-let via its sister brand Mortgage Trust.
So yields up and costs are down. Can you think of another business like that in the credit crunch era?
What about those that rent?
The other side of the balance sheet is much less fun and for some must be grim indeed. If we return to the Your Move report we see this.
Rents across England & Wales now stand at £791 per month as of February, 3.3% higher compared to this point last year – or an extra £25 per month for the average tenant.
In real terms this represents quite a rise.
The Consumer Prices Index (CPI) rose by 0.3% in the year to January 2016
But wait Paul Johnson of the Institute of Fiscal Studies and the National Statistician John Pullinger have a solution.
In January 2016, the 12-month rate (the rate at which prices increased between January 2015 and January 2016) for CPIH stood at 0.6%.
Renters will be disappointed with that so shall we move on with those two gentlemen wearing dunces caps as they try on the new suits they have bought in advance of the expected Knighthood ceremony.
Rents are growing faster than wages too.
Average weekly earnings for employees in Great Britain increased by 2.1% including bonuses.
We can look back for some perspective as you see the average rent was £648 per month back in 2009 and is now £791 for an increase of 22%. This made me wonder what wages have done so according to the ONS the average weekly wage was £451 at the end of 2009 and In January was £497 for an increase of 10%. That is quite a gap as Yazz limbers up for another verse.
sure ain’t no fun
but if we should be evicted from our homes
we’ll just move somewhere else
and still carry on
Hold on, Hold on, Hold on
As you can see from the numbers above it has been much more profitable in the credit crunch era to be a rentier than a renter. Please do not misunderstand me on an individual basis buying and letting out a place has been a successful strategy and well done to those who have done it. But as we move to the collective level we see that it distorts the UK economy as good returns can be made for what is perceived to be very low risk. This is reinforced by Bank of England policy such as the Funding for Lending Scheme and by the way that “vigilant” the new buzz word actually means being vigilant for the cakes on its afternoon tea trolley. Meanwhile first-time buyers need ever more “Help” to afford a property as prices go ever higher.
I welcome the tax changes as we will soon see a 3% Stamp Duty surcharge and there are moves afoot to reduce the tax deductability on interest. But on the returns highlighted above is a 3% charge a big deal? Accordingly the situation continues to mimic the message from the Borg in my view.
We are the Borg. Lower your shields and surrender your ships. We will add your biological and technological distinctiveness to our own. Your culture will adapt to service us. Resistance is futile