Rising UK Rents Will Cushion Any Drop in House Prices
The cost to society of a dysfunctional housing market, as young aspiring buyers are thwarted while landlords saving for retirement are penalized, is rising.
As the return-to office trend picks up, UK cities are experiencing the largest rent increases in a decade. According to Zoopla, the average UK rent increased by 11.5% in 2013. Inner London led the charge with a rise of more than 17%. Rising inflation and strong wage growth are creating havoc for the 'generation rent'. It may bring about a more comfortable landing for residential property values than many had feared. Last year, the UK's property market was hit hard by rising interest rates. This was made worse by Liz Truss’s short tenure as prime minister. Falling property prices are often the reason for rent increases. Potential homebuyers become scared and turn away. When rents rise this high, it can be reversed as investors looking for higher investment returns may start to flock to the market. Slowly, the shock caused by last year's spike in mortgage costs is dissipating. As banks are flush with deposits and eager to lend, five-year fixed-rate mortgages can be obtained below the official interest rate of 4% Bank of England. The UK's economy is experiencing a strange dynamic as the BOE's hike cycle has not led to an increase in unemployment or any notable downturn. After a rise of over 20% in home prices during the pandemic, most UK homes are now experiencing a pause. According to Hamptons International research, more realistic asking prices are emerging. Over half of all sales are being completed at a discount, with average price cuts of 6.5% in January. The increase in homes for sale is encouraging buyer demand. According to Rightmove's latest survey, prices in some parts of North London have risen as high as 17% over the past year. According to Propertymark, an agency that represents realtors, the market turnover is rapidly recovering this year. The recent boom in activity is heavily influenced by the cash-rich. This year, 40% of all purchases were made by cash buyers. However, this number has risen to 70% in the buy/to-let market. In the last year, the number of first-time buyers has dropped by more than 10%. The Bank of Mum and Dad is only available to the few who can provide the capital necessary for a down payment. Similar problems exist in the rental market. Tenants in the UK now stay on average for 4.5 years, which is 50% more than a decade ago. This has significant long-term consequences for society. Andrew Wishart, Senior Economist at Capital Economics, expects rents will rise twice as fast in the next decade than they did over the past decade. There aren't enough homes in the right areas. London is suffering the worst, with a shortage of stock equal to 450,000 homes. This is 14 years of construction at current homebuilding rates. The number of rentals has dropped to half the pre-pandemic level. Due to rising finance costs and stricter regulation, the government will soon crack down on private landlords. This will only make an already severely distorted property market worsen. It will be much more difficult to evict tenants who are not interested under the Renters' Reform bill that is currently being passed through parliament. All rental properties must comply with the Energy Performance Certificate's C grade. This will make it more expensive to rent out older, less-maintained homes. A combination of decreased supply and increased demand has led to serious imbalances in the availability of properties available, particularly those for rent. This is great for people who own their homes but it can be disastrous for those who are forced to live in rented apartments. The small, amateur landlords who have invested in property to earn a return on their investment for later life are not friends. This is not a call to increase government intervention in the rental market. In fact, it is making the situation worse. However, successive governments have failed to create a boom in homebuilding. Now is the right time to act, especially with regard to the UK's restrictive planning rules.
Marcus Ashworth is a Bloomberg Opinion columnist who covers European markets. You can find more stories like this one on