The issue of rents is something which has two main drivers to attract our attention. The main one is that whilst the UK often likes to think of itself as a nation of home owners the fact is that more and more people are renting this days. Within renting there has also been a shift as fewer council houses (for foreign readers UK local authorities used to have a largish stock of housing but have much less now) are available and more people rent privately. There is of course something of an irony in the fact that in this respect we are becoming more like our European neighbours. Also there is the issue that our establishment and statisticians are trying to push a measure of inflation (CPIH) which takes owner occupied houses and imagines they are rented out and then puts that in the inflation numbers. Of course they also use such numbers to impute a rent for the income version of the GDP numbers. What could go wrong? Actually quite a lot if you go to the Royal Statistical Society to debate such issues as I do.
What is going to happen to rents?
The Financial Times has published some analysis today although you may note the last 4 words of the sentence below.
Rents in Britain will rise steeply during the next five years as a government campaign against buy-to-let investing constrains supply, estate agencies have forecast.
Okay by how much?
London tenants face a 25 per cent increase to their rents during the next five years, said Savills, the listed estate agency group. Renters elsewhere in the country will not fare much better, it said, with a predicted 19 per cent rise.
We then get a reminder of what is driving this according to Savills.
Efforts to damp the buy-to-let market, including a stamp duty surcharge and plans to limit tax relief on mortgage interest payments, are pushing investors towards “higher yielding, lower demand markets”, meaning the areas of highest demand, such as London, face tightening supply. Yields in cheaper areas of the country tend to be higher.
Here are their estimates for the numbers.
Savills said the number of mortgaged buy-to-let investors purchasing new homes was set to drop by a third to 80,000 by 2018, recovering slightly to 90,000 by 2021. Cash buyers, many of whom are investors, will drop by 18 per cent by 2018.
Ah “investors” some would call that rentiers. Also it would appear that estate agents in general are keen to put rising rents in our minds.
JLL, another estate agency group, predicted a 17.6 per cent increase across the UK by 2021, with London rents rising 19.9 per cent, far outstripping predicted rates of inflation.
Let me for the moment simply point out the tactical issue that if those planning to rent property are switching out of London then presumably that will put downwards pressure on rents elsewhere as the FT has missed this.
House Price Stagnation
As we mull the obvious moral hazard in the analysis above we might advance expecting house price rises to be forecast to match the rent rises.
Savills said prices would be flat in 2017 in the capital and elsewhere…….“We think sentiment will be affected as there is more of a realisation of what Brexit means for earnings, for the economy and for employment,” Mr Cook said.
Mr.Cook has just provided a critique of his own rent forecasts as of course the trends for earnings and employment will affect them too. Also there has to be some jam tomorrow to go with today’s dry toast.
Savills predicted a year of steeper growth — 5.5 per cent — in 2019 as uncertainty around the Brexit negotiation process abates, bringing total UK house price growth to 13 per cent in the next five years.
Ah so just like the Bank of England perhaps! If the numbers have gone against you claim it back in 2019 and then hope that when we get to 2019 everyone will have forgotten it.
What is happening to rents?
Last week we were updated on the official data.
Private rental prices paid by tenants in Great Britain rose by 2.3% in the 12 months to September 2016; this is unchanged compared with the year to August 2016.
It was kind of the ONS to make my case that this is flawed measure for inflation for me.
residential house price growth in Great Britain has typically been stronger than rental price growth, with an average 12-month rate of house price inflation between January 2014 and August 2016 of 7.3%, compared with 2.1% for rental prices.
But if we go back to rents there is a clear problem in the forecasts made today. If you look at the pattern of rental growth it follows the improvement in the UK economy with a lag ( of over a year which is another reason why it is a bad inflation measure) which means that it looks to be driven by improving incomes and probably real incomes rather than the underlying economy. Thus if you expect real income growth to fade (pretty much nailed on with likely inflation) or fall which seems likely then you have a lot of explaining to do if you think rents will rise. If 2017 turns into a difficult year with higher inflation then 2019 would be a rough year for rents if past patterns hold. Or up seems to be the new down yet again.
At a time like that renters are more likely to be singing along with Lunchmoney Lewis.
I got bills I gotta pay
So I’m gon’ work, work, work every day
I got mouths I gotta feed,
So I’m gon’ make sure everybody eats
I got bills!
As a technical point it is only in England that rents are rising.
Private rental prices grew by 2.5% in England, fell by 0.1% in Scotland and grew by 0.1% in Wales in the 12 months to September 2016.
Actually if we move to Mortgage Introducer the situation for rents in London seems to be seeing ch-ch-changes.
London rents fell by -0.11% in October, with major falls occurring in Westminster (-1.86%), Kensington and Chelsea (-1.81%), Richmond upon Thames (-0.99%) and Camden (-0.93%).
Actually the index here showed that there are very different situations across Scotland.
Aberdeen (-13.22%) and Aberdeenshire (-9.03%) saw the greatest rental falls as they were both hit by the dramatic fall in oil prices since mid-2014.
But Edinburgh City rose by 5.63%.
There is a lot at play here. Sadly one of them is the increasing way that the media reproduce what are in effect not far off press releases and call it journalism, As we look forwards the UK is so far doing okay for economic growth (0.4% to 0.5% per quarter on the evidence so far) but I expect a rise in inflation in 2017 which is more likely to subtract from that via its effect on real incomes than add to it. We know that lower real incomes are correlated and usually strongly correlated with rents which means that a reduction in the rises and maybe some falls are on the horizon (2019 or so if my logic holds).
Also an argument in favour of rental yields rising needs to address why in an era of negative interest-rates and bond yields they should be exempt? Oh and as to lower supply of houses for rent well the FT did not seem to think so only three weeks or so ago.
Rightmove, the property website, found rental listings had risen by 6 per cent in the three months to the end of September compared to the same period last year. The rise in supply was even more pronounced in London, where it climbed 15 per cent year on year.
These issues have increasing importance as the phrase “Generation Rent” implies as I expect millennials and those younger to increasingly rent rather than own things. This is an example of back to the future or perhaps a life cycle as I recall my grandparents and for a while my parents renting items such as TVs and later video recorders from places such as Radio Rentals. We do however have a new name for it as renting comes under the sharing economy does it not?
Meet the new boss,same as the old boss?