Let It Be

Renting, so common in chic Berlin and elsewhere, has never been popular in London — until now, says Ross Clark

BRITAIN HAS A desperate shortage of property, we are frequently told. A surging population combined with low levels of house-building is causing a housing crunch — it is therefore hardly any wonder that, give or take a wobble or two, the value of property just keeps rising and rising. There is just one problem with this widely accepted analysis. Why, if there is such a shortage of property, is it cheaper in real terms to rent a property now than it was a decade ago?

If there were a genuine shortage of property, one might have expected rents to have risen sharply along with house prices. But this has not happened. Although estate agents have reported a sharp rise in rents over the past twelve months, this is just one more blip in a market that has been gyrating either side of a flat trend line for over a decade.

Knight Frank’s index of rents for luxury properties in central London records that average rents have risen by 13.5 per cent over the past decade. In real terms this is a fall — average earnings have risen by 42 per cent over the same period. Savills’ rental index for prime central London shows an even more modest rise of 4.7 per cent between September 2000 and September 2010. Capital values over the same period rose by 69 per cent.

The rental market has been the forgotten cousin of the sales market. While buyers borrowed to the hilt to join the great property boom, few seemed to notice that rents languished behind. Property became like the great champagne bubble of 1999: values became talked-up on the rumour of there being a great scarcity in supply, when in fact there was ample housing to accommodate us; just not enough on the sales market to satisfy over-excited investors.

The great amateur army of buy-to-let investors were making themselves paper fortunes based on the capital values of their property portfolios, but their income from rentals was never anything other than miserly. At the peak of the boom in 2007, net rental yields (once the considerable cost of service charges, lettings fees and maintenance had been taken into account) were down to around 2.5 per cent. You could have earned more by stuffing your capital in the bank, with the added attraction of not having pesky tenants demanding a new boiler. Small wonder that by the end of the boom years the phenomenon of ‘buy to leave’ had emerged — the practice of buying property, leaving it empty and looking only for capital appreciation. What was the point in putting your shiny new kitchen tops at the mercy of a ham-fisted tenant when wear and tear was going to lose you more in capital value than you would earn in rent?

RENTS FELL PARTLY because prices were rising. With everyone scrambling to buy their homes, there were fewer tenants wanting to rent the growing mass of buy-to-let apartments that were being dumped on the London rental market. Renting, as Ed Mead of estate agents Douglas & Gordon puts it, was ‘taboo’. With finance so cheap and so easily available, even with high house prices it worked out cheaper in many cases to buy than to rent.

Times have changed. Dinner party conversation, says Mead, turns on whether renting is not such a bad idea after all. While money spent on rent is often damned as ‘dead money’, it’s better than money invested in an asset shrinking in value. With job security low, people have come to appreciate the flexibility of renting; if you rent you can make a quick exit. Stamp duty is another big disincentive to buy. Unless you’re buying for the long term, paying 3–4 per cent of a property’s value in stamp duty every time you move is becoming punitive.

With more people inclined to rent, does that mean rents will rise sharply? In the short term, probably yes. Rents on luxury London properties, according to Knight Frank, have already risen 16 per cent since their trough in June 2009, caused by a glut of property coming on to the rental market as people struggled to sell their homes in the recession. Supply now is much shorter, with 36 per cent fewer luxury properties on the rental market than there were then.

Then again, as the sales market stalls it is quite possible that we will end up in the same situation as we did in 2008, with frustrated sellers dumping unwanted properties on to the market. That would again cause a sharp fall in rents. There is a strong counter-cyclical relationship between prices and rents: when prices are growing strongly, rents tend to fall, and vice versa. This relationship was only broken in the depths of recession in 2008, when both prices and rents were falling sharply.

But one factor that is not going to be repeated in the near future in London is big supply of new property. There are plenty of sites waiting for development, but a big shortage of developers with the finance to develop them. The days of hundreds of buy-to-let apartments suddenly being released on to the London rental market are over for now — with the exception of Stratford after the Olympics in 2012.