UK rents are going to surge. Really?

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%.

Comment

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?

 

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34 thoughts on “UK rents are going to surge. Really?

  1. The sloppy media are going to blame Brexit for everything from now on! Two articles today do just that. The decline in private purchases of motor vehicles – which the article then acknowledges had been going on long before the June vote ( and before June the polls indicated remain would win). They also note that leasing companies are buying more – could there not be a connection there? The fact that my son and my neighbor have both chosen to lease instead of buy suggests to me it would be worthy of investigation. The second ‘Bexit’ story concerns a survey that fewer people are planning to take foreign holidays next year. A little bit of digging reveals that this is due to fear of terrorism and Zika and nothing to do with Brexit! Expect more of this drivel in the weeks and months to come.

    • Just go to the BBC business pages to see the agony for remainers. With even the BoE upgrading next year’s growth etc, the Kamal Ahmed headline is “Brexit economic pain delayed, not cancelled”.
      That may be so, but a slightly more distinguished economist pointed out that, in the long run, we are all dead.

  2. It really made me laugh that we have such a choice of experts to forecast our economy – estate agents or the Bank of England.
    I fully expect the Bank Of England to print more money, use it to buy up thousands of properties, jack up the demanded rents (even if left empty), then jack up imputed rents and, hey presto, we have GDP growth (for which it will take the credit, of course).
    Would that be any more cynical than QE as it stands?

    • “…we have such a choice of experts to forecast our economy – estate agents or the Bank of England….”

      Sadly they and the MSM think that they are the economy …….

      Forbin

      • Don’t forget the other heroes of the MSM, the masters of the universe, the real workers slaving away over a hot bonus all day

    • Yes James…. quite. That article was widely slated in the FT by the responders, landlords and others cited the “soft” renting market in London. I rent in Bristol however and it is frothy by comparison. So as you say neither the BoE or a realtor should be trusted, even the Fed is faking an IR rise for Dec.

    • ‘I fully expect the Bank Of England to print more money, use it to buy up thousands of properties, jack up the demanded rents (even if left empty), then jack up imputed rents and, hey presto, we have GDP growth (for which it will take the credit, of course).’

      I’m not sure you’re that far off the mark.Imputed rents back in the 60’s were apparently 2% of GDP,now they’re 11%…………

      Instead of printing money and buying houses,maybe the BoE could drop it’s standards when it comes to collateral for sale and repo arrangements.Thus enabling third parties to do the buying and managing for them.

  3. Completely off topic, but did anyone listen to Adam Broadbent from the BoE on the radio this morning. A more self-satisfied, complacent caricature of an establishment Sir Humphrey you would find hard to imagine. I believe that oleaginous is the right adjective.
    There was a glorious moment when he was asked whether he would be the next governor, given that the odds are apparently 7-4. The pause before he answered told you all you needed to know (and then the rushed “oh what a marvellous job MC is doing” as he remembered his lines.
    Priceless.

    • Hi James, I heard this interview and I completely agree with your comments. When you look back at what useful or interesting information he presented, the answer is…. NONE.

  4. One significant difference from Europe is that in those countries where renting has always been the norm there tends to be an established set of laws and regulations protecting both landlord and tenant – generally providing rather more protection for the latter than in the UK. I wonder if this has been a factor in differing rates of house price inflation ?

      • It’s NOT the case that our laws haven’t kept up, we used to have laws regarding security of tenure, etc.
        The fact is that we have repressive feudal rights to go with the regressive feudal economy.

  5. Shaun,
    Not only rents affected as increasing housing costs for utilities, local taxes, insurances etc will mean more money spent on having a roof over one’s head.
    Next year should indicate if there is a demand deficit as cost increases for essentials limit disposable income for most or can prices be raised without loss of market share ?

    • Hi Chris

      I think that you are right. With higher inflation then more than a few items at the essential end of the ordinary person’s budget are going to rise in price. That will make it even harder for rents to rise further.

  6. Rents are paid out of salaries,there’s a simple limit to what people can pay.Unlike borrowing ten times salary , buying a house on interest only and then using the capital growth to pay off the original debt.In this latter case you’re only limited by what the banks are stupid enough to lend you.

  7. HI Shaun
    Heading towards a likely mix of stagnant wages,
    inflation-disinflation and ever longer low base rates,
    I can’t see rent costs increasing, but that is my
    real world assumption.

    I love the story of the recently appointed chair of the
    pensions advisory service who was described as a
    champion of savers, is now bankrupt, he could go far
    if recruited by the vampire squid!

    Ain’t nothin goin on but the rent

    JRH

  8. A hard Brexit with all the continental Europeans going home suggests softening demand for rentals. Add in a surge in repair costs due to fewer builders and things look poor for landlords. If the currency keeps falling -> then expect to see mortgage costs rising. For the British renters it is a lose-lose scenario due to rising food and heating costs.

    Likewise, if the continential Europeans remain and the currency keeps dropping -> it implies a squeeze on spending power which is likely to squeeze money for rent.

    Either way, their prediction seems improbable. It also risks a political earthquake and legislation changes which the rentier class won’t like.

    • But the abolition of the CAP will reduce food costs, Oh, hang on a minute, Hammond introduced a UK copy of the EU CAP before the UK even looks like beginning to leave – doh!

      • in 2003, my UK food costs came down with a thump. It was due to competition, specifically the opening of a Lidl locally. Aldi helps too.

        A hard Brexit might cause administrative import problems for European wide supermarkets. Which implies less competition and higher prices at Tesco.

        • All this is true Expat but doesn’t change the fact that food prices are already hiked by the EU CAP (and soon the UK CAP) even before the food arrives at the supermarket.

          I don’t believe the UK should have a CAP for reasons outlined in my reply/question to mickc below.

          As an aside, Aldi has been taking my local area of the UK by storm opening 3 new supermarkets within 10 miles of each other. They applied for permission to build a 4th 1 mile away from the local Morrisons who promptly objected but following a 1 year legal wrangle Morrisons lost and permission was granted. Aldi announced it’s intention to start building “in the next 3 months”.

          That was 1 month before the Brexit referendum and since the result Aldi has been silent with no ground broken for their latest supermarket to be built. They probably share your view and are waiting to see what happens next before possibly throwing good money in only to find they struggle to operate under potentially damaging Brexit tariffs with a possibility of struggling to repatriate profits to Germany and the consumer suffers once more whilst new jobs at Aldi are lost.

        • Jive Bunny, I agree 100% on CAP costs. I regard the CAP as a French mechanism to pick their neighbors pockets. It’s continuation shows the rottenness of the EC system.

          I also note that a majority of CAP money goes to land owning gentry, not hard working smallholders.

      • The point of the CAP was to ensure the EU’s food supplies. At the end of WW2 Europe was starving and the EU founding fathers decided that should not happen again.
        The UK has depended on food imports since the mid 19th century. Those imports effectively destroyed UK agriculture until WW2, when there was a push to produce food. After the war, UK agriculture was subsidised, first by the UK then by the UK via the EU.
        The problem is that agriculture in the UK serves two masters..food, and the “countryside”.
        The countryside is a product of the former. To keep the countryside requires money, one way or another. Without management, the UK countryside will revert to scrub, then much later moor and woodland.
        The planning system has not helped in that it has solidified the position of “open countryside” so that no building is allowed. This effectively prevents raising of capital by selling off some land for (much needed) building, and ensures farming returns are low. It does not help that UK sgriculture has more regulation on it than other countries from whom we import.
        There is no political will or courage to change the system. So, we will have an ossified, pretty countryside, less housing than we need, and dear-ish food.
        One comment cited Aldi and Lidl…and I agree they are brilliant. They actually show just how big a margin the big supermarkets make.

        • Whilst I agree the big returns made by big supermarkets, I am struggling to see how an intensive farming routine followed by the UK only provides a low return to Uk farmers when they benefit from a CAP designed to ensure French farmers whom farm in a much less intensive way make a reasonable living out of it.

          Can you help me with that?

  9. Do French farmers farm less intensively? That has not been my observation on my visits. There are certainly small farms but the large ones farm just as intensively.

    • My observations have been that there are many small holding farmers in France whom do indeed farm less intensively, they have to because of their small size. In the UK my observations have been of a few small holdings that are of course not intensively farmed but many large farms that are intensively farmed.

      So, on balance YES French farmers DO farm less intensively by way of the fact that it appears the majority of them have small holdings whilst the majority of UK farms are large intensively farmed holdings. You appear to be supporting a CAP to help the few whilst it benefits the many providing them with super normal profits.

      A targeted CAP that is RESTRICTED to small holding farmers would be appropriate instead of the current one size fits all nonsense.

      • I was explaining CAP not supporting it. I was also attacking the UK planning system, which generally does not allow development in the countryside thereby trapping farmers into reliance on farming rather than allow diversification and thus less need for subsidy because other income streams would be created.

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