26 October 2023

The Rental Market: A Mess In Search Of A Solution

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Our business is primarily about buying houses and flats - though we do have a busy rental search department in London. Why would the majority of our clients be interested in the rental market, in London but also anywhere in the country? To paraphrase Trotsky on the subject of war, you may not be interested in the rental market but the rental market is interested in you. Though you might own your own house, your children may be trying to find somewhere to live after leaving university. You might like the theatre - but where are the actors going to live? And the nurses in the hospital you might need to use? In fact, anyone without access to some capital, the starting point for any mortgage. As rents go up, disposable income falls - not good if you are a consumer-facing business. You may not need to stand in a queue of thirty people to rent a damp slum but, in one way or another, it affects you.

It is now being called the ‘rental crisis’. What does this look like? In a nutshell, a massive mismatch between supply and demand. Focusing on London, Rightmove reports that there are an average of 25 viewers per available property. The number of lets (deals done) are down 60% from the period 2017/2019. Average rents are now over 30% higher over the same period with an 8% increase this year up to August. There are now 41% more tenants looking for 35% less properties. Though the rate of increase has slowed slightly in London this year, the trajectory is still upwards. As rent (and mortgage payments) are the main monthly outgoing for most people, certainly those under 40, the effect on the mass consumer is not pretty. No wonder travel agents, bars and restaurants are reporting tough times. Pay the rent or go on holiday? Not a choice really.

Like the proverbial frog in the bath, this process has been going on for some time and has two main legs. The first has been what amounts to a war by the government on landlords. This started with the withdrawal of the ability to put interest costs against rental income for tax purposes. This was finally phased out in 2020 and made the returns from residential property distinctly less attractive. This only applied to residential property not commercial - the logic of which is not immediately apparent. At the same time government regulation, entirely well meant in protecting tenants’ interests, has made life as a landlord more difficult. The latest Renters Reform Bill, amongst other things, outlaws ‘no-fault evictions’ and adds more efficient EPC standards to be met. In 2016 a 3% surcharge was added to Stamp Duty for anyone purchasing a buy-to-let.

The other leg is the rise in interest rates. This has had two effects. For any landlords who were wondering if the returns made up for the hassle, it made up their minds for them - and they have exited the market. For those thinking of going in, the income sums didn’t add up and the prospect of capital gains - which has fuelled the market for the last thirty years - has turned into a prospective capital loss in a falling market. On the other side of the fence, interest rates have dealt a blow to prospective buyers who can no longer afford to buy and are now thrown back on the rental market adding to the ranks of too many tenants chasing too few properties. A perfect storm on both sides of the rental divide and a classic tale from the Law of Unintended Consequences.

The irony is that much of the government legislation doesn’t affect the truly egregious landlords who are mainly at the bottom of the market, servicing students and those on social security. This is a market where deposits are often just deferred rent and where the minimum standards for just about anything are often not met. These are properties that can yield north of 10%, compared to barely 2% net in London. Higher interest rates affect the first but are, to some extent, compensated for by higher rents and desperate tenants, but fundamentally change the equation for the second.

Where does this all end? Not soon, certainly, with a lame-duck government that has had eleven housing ministers in the last thirteen years: a prize for anyone that can name the latest? If they’ve been midwives to the mess we are in, it’s unlikely they will be clearing it up - certainly not in a year. So what will Labour do? They are not ideologically on the side of landlords; rentier is a pejorative term in left-wing circles. But it must be obvious that a dysfunctional rental market is bad for everyone and with higher interest rates becoming the new normal, the owner-occupied market isn’t riding to the rescue. It is unrealistic to think that a Labour government is going to row back on legislation that protects tenants, but the tax treatment of interest on buy-to-let mortgages is something that might make potential landlords think again and keep existing ones in the game. The reality is that being a residential landlord is hard work and hassle and the circumstances that drew investors to this market have changed. Labour don’t need to hug a landlord - only accept that while one side of the market needs protection, the other needs to be made profitable enough to make the sweat worthwhile.

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