I would be the first to concede that not all predictions are correct. The great economist JK Galbraith once said that economic forecasting was invented to make astrology look good. History is littered with examples of forecasting bloopers, and not just among economists and business analysts, especially in the rental market.
More than 30 years on from the Great Storm of 1987, weather forecasters pray that they will not fall into the Michael Fish trap of offering false reassurance when a big weather event is approaching.
Despite these dangers, one forecast that could be made with confidence in recent years is now coming to pass. This was that if you undermine and reduce the supply of rental properties, as sure as night follows day, unless demand also falls, prices – and especially rents – will go up.
This was not, it should be said, a forecast which hid its light under a bushel. Everybody involved in the rental markets, most notably buy-to-let (BTL) landlords and their representative bodies, warned that the tax assault on landlords, initiated by George Osborne, would have precisely this effect.
Osborne’s assault, the Stamp Duty premium, the change in the tax treatment of mortgage interest, together with other measures people will be only too well aware of, was always going to reduce the supply of rental properties.
More than three years ago, writing in The Guardian of all places, the columnist Simon Jenkins wrote: “Is George Osborne really a Tory?…Today, in a sudden revulsion against market economics, he is penalising buy-to-let investors – and their tenants. Osborne’s assault on BTL is mystifying. With the withering away of public housing, private renting is how ever more people live, especially in cities.”
The latest monthly residential market survey from RICS (Royal Institution of Chartered Surveyors) shows this effect clearly at work. The good news is that a tight lettings market is resulting in higher rents, with a balance of 25 per cent of surveyors expecting rental growth to strengthen in the coming months, the highest figure for three years. The bad news is that much of this is due to reduced supply, not rising demand. Landlord instructions have now fallen for 13 successive quarters.
A selection of responses in the RICS survey tells the story. As one Yorkshire agent put it: “Lettings are still very busy, stock is low as landlords are selling up due to the tenant fee ban. New investors are currently thin on the ground.” Or, from the West Midlands: “We remain concerned as more landlords are considering selling rather than renewing leases with tenants.”
An agent on the South coast put it like this: “Rental markets will be squeezed. Private Landlords will be more scarce and rents will rise, putting pressure on renters.” In London, in the south of the capital, one agent was clear: “Limited supply of property due to government measures is discouraging investors from BTL properties.” In North London, meanwhile, it was a similar story: “The loss of some ‘amateur’ landlords, due to increased tax and regulation has resulted in upward pressure on rents.”
The elephant in the rental room
You get the picture. It is all happening exactly as expected. The forecasts were right, and it wasn’t exactly rocket science to figure that out. So, what should be done about it?
Simon Rubinsohn, chief economist at RICS, says: “The lettings market data continues to send a very strong message that institutions need to upscale their build-to-rent pipeline, to address the shortfall resulting from the decline in appetite from BTL investors. It is significant that the near-term rental expectations indicator has climbed to a three-year high.”
It is a point of view, and certainly more institutional involvement in the rental market, so far mainly confined to a few pioneers, would be a good thing. But we should not ignore the elephant in the room. The current situation has arisen because of a former Tory chancellor’s decision to attack the BTL sector with a series of damaging tax and regulatory changes.
Reversing some of those would be a pretty good way of preventing landlords from exiting the rental market and even encouraging others to move back in. It does not seem to be on the government’s agenda. But maybe it should be.