Over the last few months I’ve been predicting that the rate of rental inflation (i.e. how much rents are rising by) had been easing over the last year. At the same time, I made the claim that in some parts of the UK rents had actually dropped for the first time in over eight years.
Recent research is beginning to show that I was correct – but will this continue into the future?
First, let’s examine what’s been happening in Rotherham.
Rents for new tenancies here only grew by 0.8% in the last 12 months (i.e. not existing tenants experiencing rental increases from their existing landlord). When we compare that current rate with the historical rental inflation in Rotherham you can see that there has been a lot of variation over the last few years:
- 2016 – Rental Inflation was 4.8%
- 2015 – Rental Inflation was 2.8%
- 2014 – Rental Inflation was -3.4%
The reason behind this change depends on which side of the demand/supply equation you are looking from.
The Tenant’s Perspective
On the demand side (from the tenants point of view) there is the uncertainty of Brexit and the fact that salaries are not keeping up with inflation for the first time in three years. Critically this means tenants have less disposable income to pay their rent.
As an aside, it is interesting to note that nationally, rent accounts for 29% of a tenant’s take home pay (statistic from Denton House).
The Landlord’s Perspective
On the supply side of the equation (from the landlords point of view) Brexit also creates uncertainty.
However, the biggest issue was a massive upsurge of new rental properties coming on to the market in late 2016, caused by George Osborne’s new 3% stamp duty tax for landlords in the first part of 2016. This meant a lot of new rental properties were ‘dropped’ on to the rental market all at the same time. The greater choice of rental properties for tenants curtailed rental growth/inflation.
A slight softening of Rotherham property prices has compounded this. Figures from The Bank of England suggested that first time buyers rose over the last 12 months as some were more inclined to buy instead of rent. Together, these factors played a part in the ongoing moderation of rental growth.
The lead up to the General Election in May didn’t help – after all people don’t like doubt and uncertainty.
So now that we have a mandate for going forward over the next 5 years hopefully that has removed any stumbling blocks stopping tenants making the decision to move home.
The Underlying Problem
So what about the future?
Whether we end up with a ‘hard’ or ‘soft’ Brexit in these negotiations with the EU the simple fact is, we aren’t building enough properties for us to live in. Both in Rotherham, Yorkshire and the wider UK, long-term population trends imply that rents will soon be growing faster than inflation again. Look at the projections by the Office of National Statistics:
For the more visual readers here’s a bar chart I put together to show this data:
Tenants will still require a vibrant and growing rental sector to deliver them housing options in a timely manner. As the population grows in Rotherham (and wider afield) any restriction to the supply of rental properties (brought about by poor returns for landlords) cannot be in the long-term best interest of tenants. Simply put rents must go up!
The fact is that I see this as a short-term blip and rents will continue to grow in the coming years.
With rents only accounting for 29% of a tenants’ disposable income, the ability for most tenants to absorb a rent increase does exist.