Rents to continue to rise, as supply of new property to let drops again
The most striking feature of the July 2018 survey is the continued reduction of new property being put on the market in the lettings sector with 22% more respondents seeing a fall rather than rise in New Landlord Instructions. This is the eighth consecutive quarter in which this indicator has recorded a negative number.
This pattern reflects the shift in the buy-to-let market in the wake of tax changes which are still in the process of being implemented, as smaller scale landlords exit the sector. Significantly, the drop in instructions is evident in virtually all parts of the country to a greater or lesser extent.
While the supply of fresh rental stock to the market is increasingly constrained, the Tenant Demand indicator remains resilient. The upward momentum appears to have slowed, but the number of tenants looking for a new home remains in positive territory at a headline level (+4% in the latest three month period).
One consequence of this imbalance is that expectations for rental growth, and rising rents for consumers, appear to be strengthening again. Over the next twelve months, rents are projected to increase by a little short of +2% nationally, but the shortfall in supply over the medium term is expected to force a cumulative rise of around +15% (based on three month average of responses) by the middle of 2023. East Anglia and the South West are viewed as likely to see the sharpest growth over the period.
Turning to the sales market, the underlying message is little different from that reported in June. The headline Price balance edged up from +3% to +4% in July, meanwhile, the Newly Agreed Sales net balance remained close to zero for the fourth month in succession. As we have highlighted previously, the feedback to the RICS survey continues to suggest a stronger market in Scotland, Northern Ireland, much of the north of England, the Midlands and Wales (prices and activity). Meanwhile, the London Price balance was little changed over the month (-40%) with the results for both the South East and East Anglia consistent with very modest price declines.
It is perhaps no surprise that as speculation built ahead of the August Bank of England meeting that the headline New Buyer Enquiries series was little changed over the month with a net balance of +2%. The New Instructions measure also signalled a flat picture, following two months of very modest increases. The June survey signalled some doubts as to whether the pipeline of new supply would continue to improve in the light of the feedback on appraisals being conducted by valuers. This was upheld as the appraisal balance in July was once again firmly negative. As a result, our judgement is that the average inventory on the books of estate agents is likely to remain close to historic lows. This impact of this is visible in both the twelve month sales and price expectations net balances. While the former recorded a reading of -7%, its most negative number since October last year, the latter was much firmer at +25%.
Simon Rubinsohn, RICS chief economist, commented:
“The impact of recent and ongoing tax changes is clearly having a material impact on the buy-to-let sector as intended. The risk, as we have highlighted previously, is that a reduced pipeline of supply will gradually feed through into higher rents in the absence of either a significant uplift in the Build to Rent programme or government funded social housing. At the present time, there is little evidence that either is likely to make up the shortfall. This augers ill for those many households for whom owner occupation is either out of reach financially or just not a suitable tenure.”
Abdul Choudhury, RICS Policy Manager, adds:
“Our survey suggests that recent government policy and legislation changes have impeded the growth of the Private Rented Sector (PRS), which is a vital part of a functioning homes market. Withdrawing tax breaks that small landlords relied on, placing an extra 3% on second home Stamp Duty, and failing to stimulate the corporate build to rent market, has understandably impacted supply.
“While the current focus is rightly on using regulation to improve the experience for tenants, government must urgently look again at the PRS as a whole, including ways to encourage good landlords. Ultimately, government must consider the impact of its policies, and if the wish is to move away from PRS, it must provide a suitable alternative. If they wish to improve PRS, as we have suggested by professionalising through regulation and the PRS code, there is justification to reconsider the approach taken to tax.”