London rents rocket but capping is not the answer
Rents in London are rocketing due to a squeeze on the private rental market that has dramatically reduced the supply of homes.
According to property website Home.co.uk, there were just 18,700 newly advertised properties to let in Greater London last month, compared to 28,800 in June 2017 – a drop of 35% in the number of rental properties over two years.
With demand for rented accommodation in the capital still strong, this decline in supply has led to a marked increase in rents.
Rents across Greater London are up by 7.3% over the last year, based on growth in the mix-adjusted average. But in certain central London boroughs, the rent hikes are shocking. In the London Borough of Wandsworth, rents over the last 12 months have increased by 22.1%; by 14.6% in Southwark; by 12.1% in Camden; and Hammersmith and Fulham has seen an annualised rise of 10.8%.
One solution to tackle such increases is to introduce rent capping, as proposed by the Labour Party and London Mayor Sadiq Khan. This would dictate the price level that a landlord can charge when renting out their property.
However, Doug Shephard, director of Home.co.uk, says such a move would be ‘treating the symptom and not the cause’ and it would hinder the recovery of the property sales market in London. According to the latest Home.co.uk figures, the typical London home is now worth 14% less than when prices peaked back in May 2016.
He said: “Lack of rental supply is the problem. Rent caps will just make the situation worse. I’m not convinced that London landlords will want to be participants in this Marxist dystopia, and the likely consequences for future supply are obvious. Price controls in communist Russia kept bread very affordable but the shelves were bare and many went hungry (unless you had friends in the Politburo).
“In addition, the folly of rent capping would likely postpone the recovery in the London sales market indefinitely. Not an attractive proposition (or a vote winner) for the many new homeowners who managed to escape the rent-trap but are now trapped in negative equity.”
But he also acknowledges that “generation rent are not going to be happy” with escalating rents.
A key factor in the lack of supply and corresponding rise in rents has been increased regulation and taxation, which has forced many existing landlords to sell up. It has also put off many of those looking to enter the capital’s buy-to-let market.
Buy-to-let investors are now unable to offset all their mortgage interest against their profits and within two years none of this interest will be tax deductable.
In addition, increased red tape includes additional licensing for Homes of Multiple Occupancy (HMOs), in which councils can impose their own licensing on landlords letting such homes.
Furthermore, discretionary additional and selective licensing varies by local authority, which can add another layer of bureaucracy to landlords depending on the location of their rental property.
Home.co.uk’s Doug Shephard added: “Over the last few years, the increased taxation and regulation of the private rental sector by a revenue-hungry government has been like shooting fish in a barrel. For many landlords, their secure revenue-generating asset has been transformed, through legislation, into a loss-making liability. Many have chosen to exit the sector or at least trim their portfolios of all but the profitable properties and pay down some or all of their debt.”