In January, the national press reported that UK rental property demand had fallen to a two-year low, with ARLA propertymark saying that there were just 26 prospective tenants registered per branch in December.
Some would argue that the reality is of demand outweighing supply, rather than the other way around. I read these articles with interest. That interest predominantly came from the fact that, as a group, we were experiencing trends that contradicted the reports. Six months later, this is still the case, with a rental stock shortage still apparent, while demand increases.
Those looking to make a move are aware of this growing imbalance. We’re not only averaging four to five applicants for each rental property but we’re also seeing a growing trend for prospective tenants attempting to circumnavigate the application process by trying to make an offer and set down a deposit without a viewing. In our build-to-rent (B2R) developments, it is now commonplace for properties to be let ‘off plan’, before the building is complete. We’re receiving calls and emails like this daily, showing just how competitive the market really is in terms of demand.
SALES V LETTINGS
Take Century 21 UK as an example, we have a slick application process and outstanding customer satisfaction scores represent this. However, we’re still seeing inherent frustration in applicants at the perceived bureaucracy of the market when it comes to the likes of referencing, deposits and tenant assessments.
We all know that the system isn’t hugely bureaucratic and that we’re ultimately here to protect the yields of landlords, but it illustrates the tensions that are arising from the demand versus supply issue.
My role spans both sales and lettings, and there are clear benefits to both. However, I can certainly say that renting has become both financially and culturally more attractive over the past few years.
‘Affordability’ has become a buzzword across almost every sector and, of course, on paper, many people are technically better off making monthly mortgage repayments rather than paying rent. With rates at an all-time low and new headline grabbing products such as Yorkshire Building Society’s 0.89 per cent mortgage, you see why it appears so attractive.
The stock level challenge needs to be overcome to unlock the potential.
However, the major issue remains the capital gap of the deposit, which is putting home ownership out of reach for many and driving them into the rental market. To put this in to context, that ‘record low’ mortgage from Yorkshire Building Society requires a 35 per cent deposit.
Figures from the Office for National Statistics show that house prices have increased by 259 per cent since 1997. Over that same period, earnings increased by just 68 per cent, meaning that the ratio of the average salary to average house price has doubled, standing at 3.6 to 7.6.
Based on these stats, for an individual to save a five per cent deposit by putting away five per cent of their income, it would take a staggering 24 years. Suddenly it isn’t that hard to see why demand in the rental sector is so high.
BAD NEWS, GOOD NEWS
What is apparent is that this demand is creating opportunity. However, the challenge of stock levels needs to be overcome to truly unlock the potential. A major barrier, at the moment, is the dwindling buy-to-let market.
Since April 2016, buy-to-let landlords and second homebuyers have been subject to a three per cent stamp duty surcharge. Coupled with cuts to mortgage interest tax relief, in many cases, this has had a dramatic impact on the yield available to buy-to-let landlords. Consequently, fewer private landlords are now entering the market, which does little to alleviate the stock problem.
On the flip side, this means that many of those properties that were being snapped up for buy-to-let are now available to first time buyers. Figures from the Council of Mortgage Lenders back this up, with the expectation that the number of buy-to-let purchases for March will have halved from 142,000 in the 12 months leading up to the stamp duty change, to around 70,000 – a drop of 42 per cent. In comparison, at the start of the year, the Bank of England reported that the number of new mortgages being taken out by first-time buyers had reached its highest level since records started in 2007.
What is clear is that we’re experiencing a period of discontinuity in the property sector. With the buy-to-let market seemingly stuck in neutral gear, it could be argued that the solution is in B2R. SDL Group’s B2R portfolio is forecast to grow six-fold by 2020, demonstrating the potential.
Overall, I would say that we’re quietly confident about the outlook for the rental market. There are obvious opportunities and, whilst there are issues to overcome, periods like this create the vibrancy and opportunity that the property sector thrives on.