The UK property market is heading to hell in a rental-boom-fuelled hand-basket. But having said that, while it is in an abysmal state, it isn't much worse now than it has been since 2008, and after the blip in 2009, since 2010 either. The problem is it isn't any better either.
Lending is still shockingly tight so first time buyers can't buy. Prices are still stagnating so the millions of home-owners in negative equity can't sell. The only thing holding prices is the fact that building is also still in the toilet, which is keeping supply low and a floor beneath prices. If it wasn't for the lack of supply and rock bottom interest rates prices wouldn't have stopped falling at 20%, and would probably still be falling now.
So, with most first time buyers unable to purchase their first home, more and more of them are turning to the rental market. There they join all those people who have lost their homes to foreclosure, those forced to rent for other reasons, and those who choose to do so. This has pushed up rental demand to incredible heights, and with it occupancy rates have grown and rents across the UK have soared.
In fact, the only ones happy at the current market are buy to let landlords. Indeed, a new study has just found that 90% of UK landlords are planning to expand their portfolios over the next 6 months. The survey by Mortgages for Business, which surveyed 218 landlords found that nine in ten plan to buy more residential buy to let property, and 2 thirds of them will need to refinance in order to do so.
It's perfect. Landlords are making good yields, they are able to raise finance, people have housing to rent and the sector is benefiting the wider economy. Unfortunately the cracks are already starting to appear, because rents have just grown too fast, and with employment still struggling and wages in stagnation for many, rents have got too big for their boots.
According to a YouGov survey for the charity Shelter, the number of people struggling to pay their rent or mortgage each month has increased by 44% over the past year, to 7.8 million people.
The research also reveals that over the past year:
- almost a million people used a payday loan to help pay their rent or mortgage
- 2.8 million people used an unauthorised overdraft to help pay their rent or mortgage, and of those 10% did so every month.
But it isn't really a new problem. Back in October Shelter said that rents were unaffordable in 55% of local authorities, and in 2009.
Although rents fell for the first time in 8 months in November they were still up 3.1% over the year. Again, we heard that although rents are rising, arrears are actually falling. But this isn't because people are finding it easier to pay their rent, it is because competition in the market means that they can't afford not to, and are cutting spending elsewhere in order to keep a roof over their head. An article by Shelter published on the London school of Economics website reads:
"We have collected evidence that these costs and uncertainties mean that renters are cutting back their spending on consumer goods and services. Increasing numbers are relying on high-cost credit to make up the shortfall, entailing high cost repayments and deferred spending cuts."
There is also the argument that because renters are spending an average 46% of their disposable income on rents, that this is also hurting the wider economy. Indeed, according to Shelter based on figures from the English Housing Survey and the ONS, if rents had risen at the rate of inflation since 2000 instead of way above it then renters would have an extra £8 billion per year of disposable income, or more than £2000 extra per household per year.
When a market experiences such rapid growth today there is always the worry that it will all go pop. But in the case of the UK buy to let sector this is unlikely because of the sheer volume of demand. For renters and the housing market this is bad news, but for buy to let investors now is a great time to be investing.
Even if the government does actually manage to save the housing market, the fix is much much more home construction and lending, so pulling the housing market back out of the hand-basket-to-hell will be a gradual process of more first time buyers getting onto the property market, and while rents may take a dip here or there, they will eventually return to stable long-term growth as has been seen for decades. Either way it seems landlords and buy to let investors can't lose – not for a while anyway.