It’s not an exaggeration to say London’s rental market is in crisis. Renting in London has reached a new nadir, transforming from a ‘sometimes unpleasant’ experience to something close to a nightmare. Rents across the capital rose 17% in 2022. To put that in context, Rightmove’s Rental Price Tracker revealed that the average monthly cost of a tenancy hit a nauseating £2,257 late last year.
What’s causing this seemingly uncontrollable upwards spiral? And what effect is it having on the wider housing market?
What’s Causing Price Rises?
Supply and Demand
It’s economics 101, but, you’ll be unsurprised to hear, that one of the most obvious reasons behind the crisis is a simple case of supply and demand. Things are seriously out of kilter.
Data from estate agency Chestertons, comparing July 2022 to the same month in 2021, suggests that the number of available properties dropped by 38%. Meanwhile, tenant enquiries shot up 60% in the same period.
What’s behind the lack of supply? Well, during the pandemic, many buy-to-let landlords, faced with newly empowered tenants, simply decided to cut their losses and take properties off the market. Some sold up, others moved back in, and many just sat on their investment.
These landlords haven’t returned to the market in anything like the numbers they need to for things to change. And, perhaps unsurprisingly, those landlords who have stayed are sticking rigidly to the logic of the market; data shows that there were 45% fewer landlords willing to lower rents in 2022 than in 2021.
The Big Return
Anyone who lived in London during the pandemic can attest that the city emptied out in a big way. Even when things began to open up again, the capital’s amenities from bars and restaurants to shopping centres, felt noticeably quieter. For a brief period, Londoners had a taste of what it was like to live in a less densely populated major city.
For renters, this was a boon. The sudden drop in demand left renters in the rare position of power, with prices falling as much as 10-15% in some areas of the city. This meant that for a short time, London became much more reasonable (if not exactly cheap) to rent in.
However, it couldn’t and didn’t last. 2022 has seen large numbers of people either returning to the city or moving in for the first time, driving up demand at a time when the supply of available properties is actually falling. The eventual outcome of this is entirely predictable even if it is problematic – rents that keep on rising.
Inflation
As we’ve often said, the housing market doesn’t exist in a vacuum. What happens in the wider economy tends to affect housing and vice versa. Inflation and skyrocketing mortgage costs for many buy-to-let landlords – particularly those with one or two properties – have been forced to up their prices simply to keep their heads above water.
What Effect Will This Have on the Buyers’ Market?
We unveiled the unholy trinity of factors contributing to the rise in rents. But what does this mean for the housing market as a whole?
The Potential Destruction of the First-time Buyers’ Market
Getting on the property ladder in London has been tough for a long while now. After all, barely a month goes by when we don’t mention the lack of truly affordable first homes. Unfortunately, it just got even tougher.
Depending on where you look, it’s estimated that the average renter in London is spending somewhere between 50% and 70% of their take-home on housing costs (it’s even as high as 80% in some boroughs). Once you factor in other costs like heating, eating and commuting, it doesn’t take an economist to conclude that renters have little left over to put towards saving for a deposit.
It’s been fashionable in certain media corners to decry profligate millennials and their penchant for avocado toast. However, with the average London deposit now sitting at £125,000 and rents so high, the prospect of home ownership is little more than something their parents did for most younger Londoners. Without outside help, be it the bank of Mum and Dad or some other injection of capital, buying has simply become impossible.
In the long term, this could have dire consequences. If buying a first home is nigh-on impossible for all but the very wealthy, then the market for those getting on the ladder ceases to exist as all but a niche.
This is far from ideal for the overall health of the housing market. After all, it can’t rely on middle-aged buyers upsizing, downsizing or buying second homes forever, age and retirement comes for all of us. Sooner or later, the housing market faces a reckoning if it fails to give first-time buyers a helping hand.
More Buy-to-let Mortgages?
It’s unlikely at the moment, the economy being in a perilous state, but it’s possible that as things stabilise we see more buy-to-let purchasers entering the market. With rents as high as they are, the prospect of investing in a second home and using the profits from tenants’ rental fees as a retirement fund may become an enticing prospect again.
However, this would of course rely on lenders making it an appealing financial decision for would-be buyers too, something that seems unlikely with mortgage costs spiralling.
Inflation Pushed Even Higher
On top of the problems for tenants themselves, higher rents may actually be driving inflation in London. Figures from City Hall reveal that inflation in London is 1.5% higher than the national rate, due to its excessive rental and food prices. This has a knock-on effect on almost everything, with the housing market no exception.
What should be done about the crisis?
We established that soaring rents are destructive for the housing market as a whole. Now, for the tricky part, what should be done about the crisis?
There are a couple of options on offer. First, we could leave things to the market and hope it corrects itself. As mentioned earlier, an influx of buy-to-let landlords would at least solve the supply problem.
However, this comes with a few problems. Barring a cataclysmic event, like COVID-19, rents in London don’t tend to decrease. Whatever the price is currently simply becomes the ‘common-sense’ base rate for fees next year. And, anyone buying a buy-to-let property in the hope of taking advantage of current rental prices is likely to want a healthy return on their investment – little incentive to offer more reasonable rates.
This might mean more houses available, but if they remain punitively expensive for tenants to live in, how much has the problem really been solved?
The second option is wholesale reform. One way this could work is rent controls, whether that’s price caps, longer and more secure tenancies, or higher standards for the condition of properties. This is often depicted as the first step on the road to a communist hellscape or a surefire way to ensure no one offers private rentals, but there are plenty of cities in Europe (Berlin and Vienna to name two) where this works in conjunction with a lively purchasing market.
On top of this, the government should look to undo the disastrous consequences of Right to Buy and increase the social housing stock. Perhaps this could even coincide with a return to the scheme itself, but it must happen alongside a concerted programme of state-led homebuilding.
None of these options is easy, but short of huge wage increases for large swathes of London, what choice do we have? The future of the housing market is at stake.
