Thursday, June 9, 2011

Is it just me or does this not make sense?

Rising rents price tenants out

Because people can't get mortgages to buy overpriced houses thanks to the collapse of the Ponzi scheme credit bubble there is a shortage of rental property driving up rents. [So maybe you had better buy an overpriced house by any means possible fair or foul!? But surely if less people can buy houses they can rent the ones they would otherwise have bought, unless the sellers enjoy keeping them empty and losing money by foregoing the rental income. The RICS survey this reports on says that "an increasing number of renters are priced out of the market". So are they priced out of both mortage and rental markets..? I haven't noticed a marked increase in homelessness, a la cardboard city in Japan...]

Posted by nickb @ 10:57 AM (2546 views)
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53 thoughts on “Is it just me or does this not make sense?

  • mark wadsworth says:

    “unless the sellers enjoy keeping them empty and losing money by foregoing the rental income”

    There is an element of that, yes, it’s the only way to explain it. Of course there is no marked increase in literal homelessness because people just huddle together a bit, stay with M&D, continue sharing the same house with the same people they went to Uni with, couch surfing and so on.

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  • The ‘evidence’ of rising rental incomes is apparently that 40 odd % more surveyors say rents are rising than falling. It’s not very scientific. If I wanted to persuade people to buy an overpriced house, I would not tell them that rents are constant or falling.
    N

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  • I do occasional worked exercises, calculating headline rental yields for various classes of property in various parts of the country, and then computing whether the yields are commercially adequate against the hypothetical projection that house prices will keep pace with wage inflation over time (not that I believe they will, but many BTLers do)

    There is a significant gulf between what is commercially adequate for those who own a property outright, and for those who are taking a levered position (BTL mortgage). Capital that is exposed to that degree of risk demands higher returns.

    As a little under half of UK rental property is mortgaged, I take the average of the two positions.

    And the result? Just about everywhere, rents are still too low.

    At the gutter end of the market, where rooms are individually let in run down districts, the returns seem to be theoretically adequate; but bad debt and Selective Licensing spoil the party.

    At the top end of the market in non-urban locations, the rental returns are sometimes less than 3% – wholly inadequate.

    Much is made of student lets in university towns, but unless you can get your student to sign up to pay for 365 days instead of just term time, the returns don’t look very clever.

    In the mainstream residential letting areas, most rents still look to be 20-30% below that needed to be economic.

    – As I’ve observed before, if house prices are too high, economic rents will also be too high..

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  • As with those who were unable to sell at peak prices, those who raise rents quicker than average wages will find their properties remain
    un-let.

    I believe RICS have a large hand in trying to avert a housing crash, but lies cannot alter peoples ability to borrow or pay back debt.

    I can still see many dozens of un-sold houses in the Exeter area, many of which have been for sale for several years, anyone foolish enough to believe that the market is about to go up again, is possibly in serious trouble.

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  • mark wadsworth says:

    UT, rents are the maypol around which house prices dance, they are the most predicable and stable factor in the equation. Maybe they are “too high” on a human level (because of artificial scarcity) but in economic terms, rents are usually “about right”.

    So your maths is a bit upside down, it’s house prices which are 30% too high, and not rents which are 30% too low.

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  • MW,

    My point is that there is a correlation between market value and economic market rent (although it is not perfectly linear) and that either rents have to go up to levels that people can’t afford, or house prices have to come down.

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  • mark wadsworth says:

    UT, yes agreed, I was being pedantic.

    I’d like to see them try pushing up rents across the board by 30%.

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  • UT
    how can rents go up to levels that people can’t afford? By definition this exceeds their maximum willingness to pay (outbid each other). so it seems to follow that house prices must fall.
    N

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  • “so it seems to follow that house prices must fall.”

    – Precisely.

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  • Alternatively the proportion of income that needs to be spent on rent (as well as food, energy/fuel etc) might be on the rise, thus diverting from the level of the past 30 or 40 years. This is possible because of the monopoly position of landlords, the low rates of new build production and the lack of social rented accomodation (thanks to Thatcher’s Right to Buy). I.e. we might be reverting to a type of housing market that Dickens would recognise.

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  • mark wadsworth says:

    Greenmin: “Alternatively the proportion of income that needs to be spent on rent (as well as food, energy/fuel etc) might be on the rise”

    There is no “might” about it, the share of spending on these items in the RPI shopping basket has changed as follows since 1987

    Food – down from 16.7% to 11.8%
    Fuel and light – down from 6.1% to 4.2%
    Housing – up from 15.7% to 23.8%

    So overall that is a slight increase from 38.5% to 39.8%

    http://www.statistics.gov.uk/articles/nojournal/cpi-and-rpi-the-2011-basket-of-goods-and-services.pdf

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  • Greenmind,

    I rather expected rents to rise faster, and reach their current levels much sooner, than in fact they they have; and I can only assume that the reasons for them not doing so are:

    a) Young people leaving home later, and returning to live with their parents more often.

    b) Single people are not setting up up home as often as they did before, but waiting until they’ve got a partner.

    c) Young single people sharing a let more often.

    Although house building is in the doldrums, the amount of living space per person in this country is either falling very slightly or more or less keeping pace – depending on which estimates of migration you take as gospel.

    That we have a slight shortage of living space is very evident, but the impact of the factors above do indicate that rents are unlikely to go much higher, but will instead lever down prices.

    You can also project forward, and conclude that while the young generation remains ‘compressible’ in terms of the living space they occupy, that if the coalition’s targets on nett migration are achieved, the amount of homes liberated by the deceased will be almost sufficient to house them without new build.

    However, if we force the next generation to live in over-cramped conditions, they won’t breed, and we’ll get the same demographic problems that Japan is suffering from.

    – So build we must..

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  • letthemfall says:

    greenmind
    That’s what I fear is happening, a return to pre-War conditions in which the majority is held over a financial barrel by a small wealthy elite. I see no political impetus to stop this, the reverse in fact. Quite how this will play out in future I can only guess at, but the unshakeable belief of some that housing represents an inexorable store of value will have a bearing.

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  • nickb ” I haven’t noticed a marked increase in homelessness, a la cardboard city in Japan…]”

    When homeless, you are outside of the system

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  • …and you get to see the great kafka-esque absurdity of it all. The homeless are hard to see, and hard to quantify. But I can guarantee that they see you.

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  • @dill
    Homelessness is a real problem, I don’t deny it. But I haven’t yet seen claims that it is increasing sharply at the moment.

    @UT
    You say yourself that there is only a “small shortage”. I would ask where is the evidence for even that. “Build we must” seems a an inappropriate response if the problem is excessive house prices thanks to credit conditions and associated problems.

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  • Nickb

    I know you’re on a mission to disprove the need for extra house building; but every disinterested party that has studied the issue has come to the same broad conclusion.

    Using previously trashed land to increase our living space by about 5% seems entirely reasonable – why disagree?

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  • @16 “But I haven’t yet seen claims that it is increasing sharply at the moment.”

    Would a country that bases it’s entire economy on trading bricks and cement want to admit that it’s disenfranchising human lives to achieve it? It’s politically unacceptable to admit the failure. Britain is poor on resources, poor on productivity, and poor on opportunity, but the illusion of wealth must be retained at any cost. Built by a generation, for a generation, and by god they will keep it until the day they expire. And then….

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  • UT
    The costs of newbuild in terms of energy, scarce resources and land. You will say there is loads of unbuilt land, and that’s true, but I personally think we need to keep it that way as a check on environmental destruction and for food security reasons.
    There is a shortage of affordable housing, which is what I take it the various reports are measuring. But this is because prices are too high. Show me some evidence, referenced, that there is a “physical shortage”. should be easy if there is so much of this evidence as you seem to claim.
    N

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  • if the land is previously trashed, there is still an energy and pollution cost to newbuild. And if prices are too high because of problems with the money system, it’s better to fix that than build more. Building more does nothing that would stop the current crisis recurring in the future.
    N

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  • mark wadsworth says:

    NickB: “food security reasons”

    That’s the last rallying cry of the NIMBYs, isn’t it?

    Despite the fact that less than five per cent of UK land is residential areas (houses + gardens + roads).

    And despite the fact that the UK is bizarrely enough more or less self-sufficien in food the big brake on farm output is silly EU regs and NIMBYism (i.e. we can’t have poly tunnels or industrial scale farming or GM crops or anything).

    And in theory, if people have long commutes and more homes are built nearer where the work is, there’s less commuting and therefore this can reduce use of natural resources.

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  • Interesting article on the general housing malaise plus some specific criticisms of government policy in this research paper:

    http://www.scribd.com/doc/51819077/No-place-called-home-the-causes-and-social-consequences-of-the-UK-housing-%E2%80%98bubble%E2%80%99

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  • @21 mw Beat me to it.

    @20 nb “if prices are too high because of problems with the money system, it’s better to fix that than build more.

    Agreed. The supply side argument is bogus. There’s plenty. The shortage is in the places that a spoilt population wants to live in. Everyone’s special, aren’t they?

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  • The imperative to build is borne out by houshold projections (CLG, 2008-based). According to these the number of households in England will increase from 22.4 in 2011 to 27.1 million by 2031. Thats an overall increase of 21% in this period and an average rise of 237,000 extra households each year. These households will need to be housed and filling a few hundred thousand empty homes wont be anything like sufficient. There will come a time quite soon where the stop gap solutions like staying M&D, 30+ers living like students ect wont be enough and the housing crisis will be obvious for all to see. The only solution is to increase annual build rates to above 200,000.

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  • Mark,
    whether or not NIMBYS use that as an argument is irrelevant. I’ve no doubt they marshall arguments good or bad indiscriminately to bolster their interests. That doesn’t imply that there are no good arguments against newbuild.
    As a matter of fact world food prices have doubled in real terms since 2002-4:
    http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/
    I don’t think we are now self-sufficient in food. clearly we are not self-sufficient in energy, and modern agriculture is totally fossil energy dependent. We have supply chains with minimal flexibility – hence when the oil refineries were blocaded over the fuel tax escalator, blair’s advisors told him the supermarket shelves would be empty within a week. There is such a thing as precaution.
    Also we already have industrial scale agriculture – the folks who run the farm business survey say you can’t make cereals pay with farms of less than 1000 acres, for example.
    N

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  • @greenmind
    The last thing I would believe is a CLG projection from 2008!
    f you look back over 2002-2010 or so you’ll find a lot of hits for housing shortage in the republic of Ireland. here’s just one example:
    http://www.building.co.uk/taming-the-celtic-tiger/1005205.article; note the “need” for 55,000 homes to be built per year at the end. No doubt the Irish CLG was being lobbied hard about the population projections etc.
    No one would now say they have anything other than a glut, whether in Dublin or the provinces. Did they build too many or were the calls unjustified in the first place? how are we different, apart from the fact that our bust has only just started?
    N

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  • nickb, the lack of resources argument just doesn’t stack up, it’s just down to availability of credit – or lack of it at the moment. In your neck of the woods you saw massive numbers of new builds which rose up in anticipation of the party carrying on, they were built without regard to lack of natural resources (bogus argument anyway in my opinion) or land. Don’t go getting all Malthusian on us nick. It’s all about global economics/politics and nothing to do with the bogeyman of peak oil/food/natural resources.

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  • Sorry Alan,
    but I didn’t make up the numbers on food prices; they are facts. I’m not in Ireland, but the South of England! As if politics, and even the credit bubble, has nothing to do with oil or resource prices…
    N

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  • Apologies, I thought you were in the Emerald Isle. If you think we shouldn’t build new houses because of environmental concerns, that to my mind is misguided. If the need to house additional people is there then it should be met. As for lack of land, as has been pointed out already ~5% of land is built on in the UK if we need to use a bit more I don’t see the problem. As for food security, I understand we have an obesity problem in the UK so a little less food on the shelves might be a good thing.

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  • Alan,
    I can see the discussion is getting rather mixed up at this point – I agree that credit is the dominant factor in the shortage of affordable housing, in the sense that a credit bubble has inflated prices, leading to unaffordability. But it’s not the case that shortage of credit is the problem, an argument that leads back to reflating the bubble. Nor is it the case that building more is the solution (as I was disputing) – in addition to the argument that the solution should fit the cause, there are independent arguments about overdevelopment.
    N

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  • @Alan,
    One problem is that the kind of land that gets released for development is too often agricultural or has high ecological value. Then the 5% figure is misleading on various counts, not least because not all land is habitable in the first place, and because of all the infrastructure that needs to support housing. I heard that you can’t be more than 7km (or is it miles) from a road in England. We’ve lost 95% of the UK’s wildflower meadows (to which you may say cry me a river etc.). And so on.
    N

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  • nickb @25

    I agree with you. Monetary phenomenum is distorting the issue. It’s an illusion.

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  • nick, the article states that rental demand is outstripping supply, if this is to be believed more houses need to be built, unless there are sufficient empty houses not being made available for renting for some reason – which seems implausible.

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  • nick, 5% is built on for housing and 5% developed for business/infrastructure (from memory), that still leaves 90% which is either agricultural or otherwise. I don’t see the ecological nightmare that you see, sorry.

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  • @31

    Your eloquence is matched only by your intelligence.

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  • @34

    Don’t worry. I’ve had your number for some time, mon soleil.

    Fancy a game of chess?

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  • [email protected] it would be foolish not to take CLG projection seriously as they have been put together by experts and have not been me
    ssed with to suit anyones political agenda. They take account of 2 demographic trends which are undeniable.

    (1) The population is rising, which is due to immigration as well as a surplus of births over deaths. The world population is approaching 7 billion and some of that increase is happening here in this country).

    (2) The average household size is declining year on year. Its is currently 2.34 and is expected to reduce to 2.21 by 2031. This decline is due to a number of factors including older people living longer, more family break-ups and perople choosing to live alone or not have children. There is no reason to expect this trend to cease any time soon.

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  • greenmind

    Re: your point (2). That’s (Labour) CLG projection which suggests that 25% of housing stock will be single occupancy come 2031. It’s a big problem. One they counted on to meet their engineered means, but one which will ultimately haunt them if it’s not corrected. But how?

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  • @35

    So what’s my number then sunshine?

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  • (Can’t wait to find out)

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  • alan_540

    If you have a serious contribution to make here – then make it.

    If not – consider an alternative form of entertainment.

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  • dill, I will chose to make whatever contribution I see fit, serious or otherwise. When exactly were you appointed as a forum moderator?

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  • Allowing for bouts of frustration and anger, which are common in these times, I look forward to your mature considerations, alan_540.

    I have no affiliation with this website.

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  • Jolly good.

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  • Having said that, doesn’t mean that I don’t find you to be an irritating f**k, alan_540.

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  • How rude.

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  • Stop it Alan and Dill – kiss and make up.

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  • I’d rather not kiss dill, greenmind, I suspect he’d enjoy it rather too much.

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  • mark wadsworth says:

    @ NickB, comment 24: “I don’t think we are now self-sufficient in food.”

    You can think what you like, as a matter of fact we are (more or less) and if we aren’t, this is also down to NIMBYism – think about it, The Netherlands is slightly more densely populated that the UK, and a lot smaller as well but THEY export food to US!!

    Why? Because they have no qualms about building vast greenhouses, which all things being equal are the farming method which requires least water, fertilizer, oil etc.

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  • Mark,
    According to the ag. economists where I work, we are a lot less self sufficient than we were just after ww2 – and were were not entirely self-sufficient then. The fact that a country exports food doesn’t imply that it is self-sufficient. I don’t think you can have meant that, it’s a bit of a clanger.
    Food grown under glass (and in water) doesn’t necessarily have a great taste or nutritional quality. PLus I’ve yet to see a lifecycle analysis proving its lower energy credentials… but this is by the by. If it works, and saves energy, great. It will still be fossil fuel dependent though, unless it is developed not to be. And THAT R&D is not being done. Same for polytunnels, which seem to be springing up all over the place.
    N

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  • @geenmind
    It’s true that if the housing stock does not keep pace with demographics then there will develop a physical shortage. However, we’re in danger of confusion over whether “build more” means keeping pace with population, population plus people’s decision to live alone, population plus single living plus second homes. Do you have evidence the stock is not keeping pace with current (not projected) UK population trends? That is what I am questioning, along with any assumption that rising prices are an indicator of this. They most certainly are not, because of the role credit markets play in price determination. Look at the cyclical pattern on the chart on the homepage of this website. And look at the trend line. Neither of these fit with the population trend – population is non-cyclical and in the UKs case growing more slowly than the trend line.
    Nick

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  • nickb, with regard to your point about greenhouse/intensively grown veg not being the most efficient way of producing food with regard to energy – don’t forget that we are almost infinitely inventive and if we over rely on fossil fuels (for example) to farm our food and if fossil fuels become uneconomical, we would simply switch to a more cost effective method. I know that was just a side point that you were making, but it bears examining.

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