The UK property market suffered a nasty shock last year from sharply rising interest rates, exacerbated by the fallout from Liz Truss’s brief tenure as prime minister. This year, private-sector wage growth of nearly 7% is emboldening landlords to defray their higher mortgage and maintenance costs by squeezing tenants.
An uplift in the cost of renting is often a consequence of falling property prices, as potential homebuyers get scared off. But when rents are going up by this much, the reverse can happen as the market starts to attract investors hunting for higher investment yields. With the average London rent now above £2,000 ($2,400) per month, and following a brief dip in property prices, buy-to-let value hunters are eyeing improved potential returns.
The shock from last year’s surge in mortgage costs is slowly dissipating. Five-year fixed-rate mortgages are on offer below the 4% Bank of England official interest rate, as banks are awash with deposits and keen to lend. There’s a curious dynamic playing out in the UK economy as the BOE’s hiking cycle has not yet led to a rise in unemployment or a notable downturn in the economy. It makes historical property data of little relevance to the current situation.
Home prices have been taking a breather across most of the UK, after a surge of more than 20% during the pandemic. More realistic asking prices have emerged, while over half of sales are completing at a discount with price cuts averaging 6.5% in January, according to research from estate agency Hamptons International. A rise in the number of homes listed for sale is in turn encouraging a return in buyer demand. In parts of North London, prices have surged as much as 17% in the past year, according to the latest survey from property portal Rightmove. Turnover in the market is recovering quickly this year, according to Propertymark, an agency for realtors. Its latest survey shows an 80% jump in buyer demand and a 50% increase in sales agreed.
This recent surge in activity is heavily weighted towards the cash-rich, with some 40% of all purchases this year by cash buyers, rising to as high as 70% in the buy-to-let market. The number of first-time buyers — typically the most leveraged — has fallen by more than 10% in the past year, with the Bank of Mum and Dad only available for the lucky few to provide the necessary capital for a down-payment. With only about a third of UK properties having associated debt, the limited prospects for young workers to get on the housing ladder make a mockery of the government’s stated aim of leveling up.
The rental market is similarly dysfunctional. Across the UK, tenants now stay for 4.5 years on average, 50% longer than they did a decade ago. This has major long-term implications for society. In the coming years, Capital Economics Senior Economist Andrew Wishart expects rents to increase at twice the rate of the last decade. There just aren’t enough dwellings in the right places. The situation is the most acute in London, with the shortfall of stock equating to 450,000 homes — 14 years of of construction at recent homebuilding rates — and the number of available rentals down to less than half of pre-pandemic levels. The government’s coming crackdown on private landlords, stung by soaring finance costs and more stringent regulation, will only worsen what is already a seriously skewed property market. The Renters’ Reform bill currently passing through parliament is going to make evicting unwanted tenants much harder. From 2025, all rental properties will have to comply with a highly-efficient C grade in the government’s Energy Performance Certificate, incurring heavy costs for older or less well-maintained dwellings. No wonder many existing landlords, who rent out second homes to build up a retirement pot and typically have large mortgage debts, are exiting in droves.
Reduced supply combined with increased demand is leading to serious imbalances of available properties, especially of those to rent. That’s great in theory for those who already own their homes, but disastrous for those who risk being consigned perpetually to rent. Small amateur landlords who invested in property to get a return on their capital for their old age are friendless. This is not a call for more government intervention into the rental market — quite the opposite — as all the meddling is making a bad situation worse. But successive administrations have promised and failed to kickstart a surge in homebuilding; the time for action, particularly with regards to the UK’s highly restrictive planning rules, is now.
More From Bloomberg Opinion:
• Mortgages Offer Relief to Cash-Crunched Britons: Marcus Ashworth
• The UK Consumer Nightmare That Never Was: Andrea Felsted
• Liz Truss Might Have the Last Laugh Yet: Martin Ivens
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was chief markets strategist for Haitong Securities in London.
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