The May 2013 Inflation Report indicates that the Bank of England is a little more positive about the UK’s short-term economic prospects. The Bank thinks that economic growth will be a bit stronger and inflation a little lower than seemed likely in its previous report.
Early indications are that GDP grew by 0.3% in Q1, a slight improvement on previous estimates and outcomes. This change in emphasis is positive and welcome, but this does not alter the fact that we are likely to experience a long, slow and relatively weak recovery over a number of years.
On a more negative note, those people in employment in Q1 fell by 43,000 to 29.7 million and unemployment in Q1 rose by 15,000 to 2.52 million (7.8%), with average earnings rising at only 0.8% per year.
The upshot is, and this is a key factor for landlords and retailers, household finances are likely to remain under pressure as inflation is expected to top 3% before returning to its predicted 2% target in two years’ time.
In the meantime landlords are still optimistic and there’s been a growing interest in property investment from first time landlords taking advantage of the low interest rate environment and more recently government incentives for home loans.
Consequently buy-to-let mortgage applications have soared by around 25pc (CML estimates) in the past year as landlords and investors have taken advantage of what appears at first sight to be ideal conditions.
However, this new mini “investment boom” is attracting some harsh criticism of landlords in the press as being evidence that landlords are becoming the main beneficiaries of the state-backed housing scheme – the Funding for Lending Scheme (FLS).
Some commentators have dubbed FLS the “funding for letting scheme” arguing that this is favouring wealthy investors at the expense of first time buyers.
Fears that this will rapidly lead to higher housing prices and another housing boom appear to be supported to some extent by research published by analyst Hometrack and the International Monetary Fund (IMF).
Hometrack reported recently that a shortage for homes for sale and buyer competition has led to the strongest increase in prices in May for six years. The IMF have also warned that making borrowing cheaper without increasing supply will lead to higher prices, defeating the object of the incentives which were intended to help first time buyers.
However, there is some evidence that an increase in the supply of rental property is beginning to stabilise rents after several months of sharp increases. Average monthly rents appear to have remained at the same level as last month. The figures now available for April indicate this as the number of properties available for rent now seems to be catching up with the unprecedented tenant demand over the last year or two.
However, renting is not the same everywhere. Analysis by Hometrack appears to show that around 75% of lettings last year were concentrated in just one quarter of the UK.
The Hometrack research has segmented the rental market across the country, dividing it into mature, active and inactive markets.
The “Mature Markets”, those having high concentrations of rental supply and strong turnover, are clustered in just 7% of the country and account for 29% of the UK’s rental stock. These tend to be large urban areas – often university towns – where rental demand is at its greatest.
The “Inactive Markets” according to Hometrack account for 71% and contain 38% of the UK’s private rental housing stock. Inactive markets are defined by areas where rental demand is at its lowest and landlords run the risk of long periods of voids.
Landlords, developers and local authorities need to be aware of these factors when looking at local rental demand and rental levels. As long as affordability constraints act as a barrier to owner-occupation, in general rental demand will remain very healthy. However, the Hometrack analysis shows that there is folly in investing in or building homes to rent in locations where there is no viable rental market.
As always, London stands out as a market alone with the highest concentration of rental properties, with high tenant demand and consequently the highest rents in the country.
Landlords need to be aware that some areas represent greater risks of voids and low returns than others.
Good quality research and due diligence are needed to search out viable locations. Where there is under supply and high tenant demand, returns can be secure and profitable. But as the supply situation changes, especially in markets like student lets, where institutional investors are moving in, investment returns may eventually come under pressure.
By Tom Entwistle