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How does the decline in London house prices affect landlords and the private rented sector?

It’s been reported that house prices across Greater London have dropped by around 15% over the past year in some of the first evidence that Brexit is beginning to have a dramatic impact on the UK’s housing market and more broadly, the economy. So what do landlords need to know about the changing housing market?

Data from various sources including some of the largest estate agencies in the UK demonstrate that house prices in London have declined by as much as £100,000 in some parts of London. It’s not all bad news for the housing market though. House prices in areas such as the North West have rapidly grown, with Blackburn in Lancashire seeing some of the highest growth rates.

It’s fair to say that most people realise that the UK’s housing market isn’t working as well as it should be doing. The housing market is both symptomatic and causative of growing inequality between the regions and between generations. But successive governments have done little to address the situation, which is largely driven by a lack of housing supply in the UK and by the growth in international asset prices.

The selling off of council housing over the last 35 years has enabled more people to buy housing, but this has also lead to the growth in house prices, in addition, it’s reduced capacity in the rental market, which has lead to more private landlords getting involved. It’s also meant that rents have increased as more rental properties are financed by individuals with small-scale, high-cost borrowing.

And with the exception of the property bubble in London, house prices are rising and this can only increase rents. The average house price at the end of 2017 was £227,000. That’s an increase of over £10,000 in 12 months. During that time wage inflation has been virtually static and families are coming up against growing pressures on their salaries due to the increasing costs of essentials.

The younger generation is most likely to rent property and they, in turn, are the ones who are most likely to feel the squeeze of lower income and higher costs. Resolution Foundation data suggests average real-terms hourly earnings for the under 30s has fallen by around 13 percent between 2007 and 2014.

The government has gone some way to try to help them by taking the heat out of the private rented sector. To this end they’ve changed the starting point at which first-time buyers have to pay stamp duty, they’ve increased stamp duty for second homeowners and removed the mortgage interest relief tax landlords had enjoyed.

Whilst these may help some people onto the market, the evidence suggest all this is doing is stagnating the private rented sector, increasing house prices at the lower and increasing the amounts landlords have to charge for rents. This leads to increasing the amount of time potential house buyers need to rent. Ultimately, the government still hasn’t solved the issue of a lack of supply.

The simple fact is the housing market is a failed market. In an efficient market, if there is a lack of supply signalled by growth in pricing, businesses will increase investment in order to produce more products or services to meet increased demand. But house builders aren’t building enough houses for the demand in the system. And each year this trend continues the situation gets worse.

Whilst landlords in the private rented sector can help by providing low-cost housing capacity, only through large landlords with the capacity to buy hundreds or thousands of properties could we expect the private rented market to begin to help combat this. This isn’t something that many people would like to see because it takes capacity out of the housing market for buyers. It’s also not the way the private rented sector in the UK is set up, with the largest proportion of landlords only having one or two properties and no access to the kind of borrowing required to invest.

This has become a generational crisis and not just a housing crisis. Many people will have to wait until they inherit money from their parents before they will be able to buy houses of their own. And many of those parents will have spent the majority of their assets on end of life health care.

Whilst many people will be celebrating the decrease in house prices in London, the regional imbalances in the housing market are still dramatic and reduce the mobility of the labour market, something that is essential to get the best people in the best jobs.

The government’s Help to Buy scheme only deepens the crisis by fueling demand rather than dealing with supply. The establishment's focus on regulating the private rented sector will only lead to less supply of rental property and likely see increases in rents.

Whilst there are likely some measures the government can take to get the market going again. We could scrap stamp duty altogether, as stamp duty is a tax on labour mobility and capital gains tax could be increased on the sale of properties. Or the inheritance tax threshold could be lowered significantly, perhaps to the cost of the average house. Both of those last two measures would likely be political suicide for most governments. Additionally, it’s unlikely that this will have the immediate impact the housing market needs to deal with the crisis.

It’s only through the building of more property will we begin to decrease the inequality between generations. And only by increasing supply in the right areas, whilst investing in business in those areas will we see regional imbalances being dealt with as well. Unfortunately, it likely that landlords will still be used as political scapegoats for some time to come as the alternative is politically unpalatable. However, this tactic is unsustainable and the government will have to create a new policy when it becomes clear how ineffective this strategy becomes.

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