The perennial shortage of new homes in the capital has now collided with a sharp increase in government regulation, a tripling of mortgage rates and increasing demand, to create the perfect storm for anyone trying to rent a home.
With the benefit of hindsight, this moment was always going to come. Perhaps the most concerning thing is that it’s difficult to see a way out of the problem in the short to medium term. In the end, the London economy, and the wellbeing of those that call it home are going to suffer.
There are multiple protagonists, all working in conflict with the need for more homes and without any coherent overarching strategy.
Government Policy - On the one hand central government have increased tax and regulation on private landlords. Tax changes have resulted in higher tax payable on rents received and together with increased fire safety regulations and urgent energy efficiency targets, requiring capital investment, this has deterred private landlords from entering the market and incentivised others to exit.
We also have a London Mayor whose new affordable homes targets are unattainable in many proposed new developments meaning they do not get built. Pursuing affordable housing targets at the expense of the total supply further pushes up rents and house prices. Sadiq Khan has called on ministers to grant him powers to freeze private rents in London, this alongside higher property prices further incentives landlords to exit the market, reducing supply even further.
Development Costs - Cost of constructing new homes is high. The annual rate of construction output price growth was 9.6 per cent in the 12 months to June 2022; this was the strongest annual rate of price growth since records began in 2014.
National housebuilders are most active in markets where viability and planning risks are comparably more attractive. Regional authorities are often more developer friendly than appears to be the case in London and building low density ‘boxes’ (single dwellings) is a less risky proposition for developers than high density apartment developments.
Mortgage Affordability - As at December 2022 average mortgage rates for a 2-year fixed rate 90 per cent LTV mortgage have risen to 5.96 per cent from a low of 1.95 per cent in January 2022. This threefold increase in the cost of a mortgage and the uncertain economic outlook will combine to increase demand for renting in the short and medium term as buyers postpone their decision and rent for longer.
The re-emergence of inflation and its bedfellows: higher building costs and mortgage rates have added to the structural undersupply and created the ‘Perfect Storm’. The result being a severe and intractable supply/demand imbalance and a growing housing crisis.
Across the portfolio managed by Add Living we have been seeing rental uplifts on new lettings of 10 to 30 per cent. It’s not uncommon to have over 20 viewings over the first and only weekend and a subsequent ‘best bids’ process to select a tenant. This has occurred across London in 2022 and has continued in the New Year.
In December 2022, rents reached an average £1,078 per month according to property website Zoopla. That’s an annual increase of 12.1 per cent; twice the average yearly earnings increase of six per cent. The greatest increase was in London with a staggering 17 per cent annual increase in the average rent.
Zoopla also reports that the supply of rental homes available lies 38 per cent below the five-year average. Meanwhile, demand is 46% above the average. Savills reports the highest rental growth seen in parts of the capital since 1979.
Many tenants are now asking and being granted longer leases which will of course restrict future supply as churn rates drop and existing tenants stay put for longer, exacerbating the supply problem. Add Living manages apartments and houses across all six London Zones and in our experience the situation is similar everywhere, affecting both ends of the housing ladder and everything in between.
The undersupply of housing has been baked into the system for decades and well documented but the impact this year of the wider economic headwinds and in particular, high inflation, are now playing out in the rental market with a severity that is unprecedented in recent times and no prospect of the situation abating for the foreseeable future.
So, What’s the Solution? - The problem is a shortage of supply across London. This is well documented. The only solution is to build more homes for all segments of society. The friction in supply is caused by a combination of planning policy and local politics, private sector viability and an uncertain economic and regulatory outlook.
We need a government who is thinking and acting strategically for the longer term, rather than bringing out short term policies or knee jerk reaction slogans. The aim should be to reduce the friction to enable both the public and private sectors to build more homes and to support not punish private landlords who have a real role to play in supporting a viable rental market.
In our view, the answer is not more regulation or decisions driven by short term political expediency. Housing should be treated in the same way as infrastructure with long term thinking, cross party or independent bodies, with expertise, who have the authority to intervene and make apolitical decisions that are driven by the imperative to increase the supply of homes.
* Matthew Allen and Stephen Wilson operate property management service AddLiving *
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