Are more renters good for landlords?

Joseph Harnby is a PhD researcher in economics at the University of Bristol and a property investor

The BBC recently announced that renting is now cheaper than buying in much of the UK. This is slightly misleading journalism. On average, renting is cheaper on a monthly basis when compared to the monthly cost of an average home with a 10% deposit. This does not factor in that a mortgage gets paid down over time and owners have an asset that appreciates in value. Owning is still better over the course of your life.

These kind of declarations will still attract more people to renting. The number of renters is already more than double what it was 20 years ago, jumping from 2 million in 2000 to 4.45 million in 2019. If this trend continues renters will outnumber owner-occupiers by 2039. Is this good news for landlords?

Joseph Harnby

The answer is: yes in the short to medium-term and no in the long term. In the short and medium term, the fact that so many people are being pushed into the rental market creates upward pressure, making the yield returns on many properties more attractive than previously. Anecdotally, I have seen this in my own investments over the pandemic, with yields opening previously no-go areas for investment. This bears out in the data too.

Rents have risen by as much as 10% over the last year in the UK. This growth in rents has been matched by growth in average purchase price, up by around 10% too. This means that overall yields have remained relatively static. It is only savvy investors, who have invested in locations where rental growth has outstripped purchase price growth who have benefitted from this right now. It is only when we look to the medium-term that we see benefits for all landlords.

As more people rent, driven by cheaper monthly prices, stagnant wage growth, and the growing crisis of home affordability, landlords will find their yields improving significantly. Capital appreciation will remain strong, fuelled by demand, lack of supply, economic recovery, and (say it quietly) economic growth post-Brexit and COVID. This is a perfect sweet spot for investors. Better yields and good price growth.

The problem is that it may not be too long before the sweetness sours. Home ownership becoming out of reach for such a large amount of people is a problem that the government cannot flirt around forever. Since the 1960s, wages have grown from £22,000 in today’s money to £30,000. Over the same period, average house prices have grown from £55,000 to £256,000. Mortgage offerings have improved since then, to cover the shortfall, but we saw in 2008 the problem of diluting mortgage affordability criteria without corresponding wage growth. This trend in home affordability is not sustainable.

If this becomes a crisis of home affordability then we landlords may well become a victim of our own success. High rents will take many people out of the housing market, reducing demand, and hampering capital appreciation. Landlords are not incentivised to pay over the odds for a home in the way a typical homebuyer would and are far less numerous, so prices remain low. Low wages will provide a cap on how high rents can go, meaning that the lack of capital appreciation cannot be indefinitely supplemented by rental increase. This would make property investing less attractive.

Crucially, renters outnumbering owner-occupiers to such an extent would be a huge wealth transfer to the landlord class over the next 20 years. This would cause problems for the state pension in the long run, with the government needing to make up the difference in wealth as people retire. Government regulation will be necessary before this home affordability discomfort matures into a crisis. And this is where the danger for landlords lies.

If the housing market is allowed to progress to sickliness then we suffer too. Stringent regulation and low capital appreciation are not good news for landlords. Instead, an earlier intervention is more desirable. Softer regulation by government now and better schemes to help low earners buy homes keeps the sweet spot going for as long as possible. This is what landlords should encourage, so property investing remains as attractive as it currently is.

In the meantime, landlords can all thank the BBC for the free advert.

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