Renting Kills The Economy

[Ben from Dover]

Rents seem pretty high in London/SE, at least £400pcm for one room in an HMO, £500 for a studio flat, £600 for a 1 bed flat, £700 2 bed, £800 3 bed. That is not loose change for most people. If you bought something for £100k in 1996 on a 5% repayment mortgage you would now be paying less than £600pcm. £100k would have got you something pretty decent at that time, maybe a 3 bed detached in a good town. Maybe renters are on a great deal in some parts of the country or in really huge low yield houses, but cheaper rentals in London/SE don't seem like a good deal to me at all.

We've just moved into a new rented flat at £350 p/m, nice enough place, nothing flashy but near the sea side and under an hour to London by train.

[Dorkins]

We've just moved into a new rented flat at £350 p/m, nice enough place, nothing flashy but near the sea side and under an hour to London by train.

Congrats, hopefully you are at the bleeding age of a coming fall in rents! I think people who bought their home in London/SE pre-1999 would mostly be appalled at what they could rent in their area for what they are paying on their mortgage. Something is wrong when the young couple renting a 40something's starter home are paying more in rent than he pays on the mortgage for his family home.

[kingsgate]

Doesn’t it also work the opposite way. Lots of my friends fall into the trap of buying something, then disposing of it because it doesn’t fit into their new flat only to buy a similar item again 6 months later. I’m 27 and have owned 7 sofa’s during my life. If I owned a house and didn’t end up living quite a transient lifestyle I would probably have only had to buy 2.

I don’t know how many toasters, kettles, hovers ect I’ve bought over the last 7 years. Certainly more than my parents would have done by 27.

In this way renting helps the a throw-away consumerist economic model. (Not that I think it is a good thing)

Isn't this a lot to do with how most household gadgets have become cheaper, but also non-repairable and more likely to break after a year as well?

[Si1]

Congrats, hopefully you are at the bleeding age of a coming fall in rents! I think people who bought their home in London/SE pre-1999 would mostly be appalled at what they could rent in their area for what they are paying on their mortgage. Something is wrong when the young couple renting a 40something's starter home are paying more in rent than he pays on the mortgage for his family home.

late 90s property was undervalued following the mid/early 90s crash, simple really, but not a long term value

[Dorkins]

late 90s property was undervalued following the mid/early 90s crash, simple really, but not a long term value

Maybe, I'm still not convinced that rents are some magical stable indicator of the 'true value' of property though. Seems to me that if everything else can rise and fall with economic bubbles, rents can too. What would have happened if the BoE had started raising interest rates to control the incipient property bubble from 1998 onwards? Since they didn't, and we only had 2-3% inflation in the wider economy, would we actually have had mild deflation under a more appropriate interest rate regime? Would rents have deflated too? I am curious as to what an undistorted 1995-2010 economy would have looked like because I have a feeling that's where the likely upcoming crash is going to take us, albeit in a quick and brutal way with a probable overshoot instead of the slow adjustment it would have been had politicians not inflated an economic bubble instead.

Some factors which may have held rents up: HPI effectively eliminating the option to buy from millions of people and subverting the normal renting vs buying competition which holds down rents, increasing private sector debt repayments sucking in money from the rest of the country and pushing up rents in London/SE where most financial sector wages are paid out (not all bankers are buyers), increased government deficit spending through the DSS.

[Goat]

Maybe, I'm still not convinced that rents are some magical stable indicator of the 'true value' of property though. Seems to me that if everything else can rise and fall with economic bubbles, rents can too.

Disagree.

When rents rise (relative to incomes) the tennants (as a body) are chosing to devote more of their income to consuming housing and less on other goods and services. There may be good reasons for this (such as immigration or a restriction on supply) but these are not necessarily indicitive of a bubble.

Where prices rise but rents stay the same this indicates an absence of increased demand for housing and instead a change in the way in which people value properties. Such a change in general indicates the presence of a bubble, since the alternative valuation methods are likely to be flawed in one way or another, being based on wildly unrealistic assumptions over future income or growth, or both (see e.g. Dutch Tulip bubble, Wall Street bubble 1929, dot.com bubble of late 90's or UK housing bubble of approx. 2001 to date).

Edited March 1, 2010 by Goat

[munro]

Disagree.

When rents rise (relative to incomes) the tennants (as a body) are chosing to devote more of their income to consuming housing and less on other goods and services. There may be good reasons for this (such as immigration or a restriction on supply) but these are not necessarily indicitive of a bubble.

Not much a choice for most of us - more a necessity.

Where prices rise but rents stay the same this indicates an absence of increased demand for housing and instead a change in the way in which people value properties. Such a change in general indicates the presence of a bubble, since the alternative valuation methods are likely to be flawed in one way or another, being based on wildly unrealistic assumptions over future income or growth, or both (see e.g. Dutch Tulip bubble, Wall Street bubble 1929, dot.com bubble of late 90's or UK housing bubble of approx. 2001 to date).

Alternatively it indicates a fall in the cost of housing to those buying to rent out, as they are paying less for the money (all about the yield). It is striking that slashing bank rate from 5% to 0.5% with concomitant cuts for many mortgage holders has not seen much of a fall in rents. It looks more as if LLs have simply widened their margins. If the market worked as well as some on here seem to think, and given that rental demand is likely to be more elastic than buying, one would expect to see far bigger falls in rents. It is hard to call a bubble when it isn't clear what is going on - in particular that our government have abandoned rational measures in favour of Alice-in-Wonderland policies.

[Si1]

It is striking that slashing bank rate from 5% to 0.5% with concomitant cuts for many mortgage holders has not seen much of a fall in rents.

of course it hasn't - rents arew dictated by supply and demand of rentable properties - any trickle through of availability owing to lower interest rates will be very slow

[Si1]

Maybe, I'm still not convinced that rents are some magical stable indicator of the 'true value' of property though. Seems to me that if everything else can rise and fall with economic bubbles, rents can too.

incorrect

you are talking about bubbles as if they are general. they are not, they are specific to the asset classes that capture the sheeples' imagination.

you cannot leverage low interest rates against rents as a renter, so low IRs only have a limited impact.

[roadtoruin]

Maybe, I'm still not convinced that rents are some magical stable indicator of the 'true value' of property though.

Rentals are clearly only an indicator of property 'value' within certain price ranges, the 'affordable' range where most renters are looking. Generally as the market price increases, rents do not follow proportionately.

So (and I'm quoting my area, not London) a 200K property will rent at about 600pm, a 400K property around 1000pm, and a 800K property maybe 1500pm. The higher the 'price' of the house, the lower the yield, and the better the theoretical value the renter is getting. This has always been the case, is much quoted on this site, and is why, for obvious reasons, BTL scum target low-to-average priced properties where yield is optimised.

[Guest absolutezero]

Says you, some people generally force LLs bad ones to spend money on their properties, most LLs I have encountered keep deposits, I get around it by not paying the last few months of rent.

Others like some of my mates are less kind, they cut keys before handing them back and completely trash the property and even cause structural damage.

The Witch of Manchester in Ardwick had cheated students for YEARS, even me and I had video evidence of her lies about breaking things, she even charged me £50 a day for keeping the keys when SHE forgot to keep an appointment to take them back. She crossed the wrong people once and thought she was so smart a bunch of Ukrainians. They cut keys before giving them back and returned with pneumatic drills and hammers the place was completely trashed and had massive massive structural damage. People gathered to laugh the Ukrainians were on their way home back to Kiev that night.

Treat people as you would want to be treated yourself.

[munro]

of course it hasn't - rents arew dictated by supply and demand of rentable properties - any trickle through of availability owing to lower interest rates will be very slow

If it was a proper market then a cut in the cost of money would lead to an influx of new LLs who would undercut existing LLs. The latter would then suffer voids and would have to cut their prices accordingly. This hasn't happened because there aren't enough suitable properties coming on to the market for would-be competitive LLs to buy up. This is why it is wrong to think that the usual rules for markets apply to housing, because they obviously don't. The "slow trickle through of availability" is arguably a way of denying the alternative view that it is not a functional market at all. You claimed earlier:

good grief.

so increased and more professional competition means less competitive market? you will get such a shock.

But more competition is exactly what we aren't seeing. If we were then the cut in interest rates would lead to a cut in rents. It hasn't because it isn't a properly functioning market. The question now is, how rigged is it and how can one respond to this?

[Once in a lifetime]

I take it you're too young to have been exposed to rentals from more than, say, a decade ago?

Todays rentals are incomparably better than when I was young. And much cheaper compared to either wages or houseprices.

Piffle.

Prove it.

In the 70's just an average joe could support a family and keep a roof over their heads. (on his own wage)

Now you need to be a couple of professional go-getter-high-flyers-executive incomes but forget about having kids type persons.