D.J. Alexander - Estate Agents & Property Managers

Residential lettings give clue to wider economic performance

15/10/2009

As economics is often considered to be an art form rather than exact science, it should hardly come as a surprise that so many contradictory statements are being made about business confidence, levels of debt and the wealth of the nation by commentators considered “experts” in this field.

So are there any other sources that might give a clue as to the present and future state of the national economy?

I would suggest that the residential property rental market could be one such barometer.

Consider the trend in the cost of new property leases agreed during the summer months that, in Edinburgh at least, suggested that average rental rates had fallen. In fact, the real reason was because the greater number of properties let to new tenants during June, July and August were at the smaller end of the market (i.e. one-bedroom, or compact two-bedroom, flats).

Further investigation shows a wider picture portrayed by these rental statistics. Basically, more new lets this summer involved smaller properties because so many leases held on larger properties were being renewed, rather than given up, by their existing tenants. These occupants were not renewing their leases out of a particular love of renting, although to a growing number of people this form of tenure is starting to look attractive in the longer term as houses prices show no sign of any meaningful recovery. The rental situation is, therefore, a sure sign of one of the most salient repercussions of the mortgage famine – young singles and married couples unable to get on the first rung of the ladder of home ownership. But this view is not simply based on our own returns. This week a national UK website specialising in the rental market revealed that the average age of tenants in shared rental flats had gone up from 25 to 28 since 2006.

Even a proportion of those who have been granted a mortgage ‘approval’ by one of the banks or building societies are still reluctant to buy – or, at the very least, neutral about buying – property at the moment. Popular opinion has it that first-time buyers (obviously with no worries about selling) are biding their time in the hope that house prices will fall further. This is probably true in some cases but I believe there is a wider, more tangible, reason. Younger homeowners have, traditionally, looked to manageable house price inflation to help them move onward and upwards within the owner-occupier market. This has provided them with some equity after paying off their first mortgage, that capital then enabling them to trade up to a larger property, which they anticipate will increase in value at a greater and faster level than the first buy – and so it goes on, literally, until their children mature and flee the nest. However with house prices static – and even, some believe, potentially in line for a further round of deflation – young people will be less encouraged to buy if they face the prospect of nil or negative equity for several years ahead.

And by remaining in rented accommodation, people are not buying new carpets, sofas, refrigerators and other household goods – something that has a direct result on the performance of the High Street.

It should not be inferred from my earlier statement about more new lettings involving smaller-end properties that large flats or houses are not available to let – and herein lies another clue to wider economic activity, albeit this time at company level. In the market in which D J Alexander operates, large properties are also mostly high-end properties – set in the most sought after parts of Edinburgh, Glasgow and other appropriate locations and used for temporary accommodation for periods of six months to several years by executives posted to Scotland from other parts of the UK or from overseas.

However, movement of people, which is one of the main symptoms of a buoyant economy, is just not there any more, or at least not to the extent that it was two years ago. Then, companies who posted executive staff to Edinburgh and Glasgow happily paid for them (and often their families) to be accommodated in the best houses in the best parts of town. Now this market has largely evaporated and those companies who are still seeking this type of property on behalf of senior staff know they can drive a hard bargain on rents.

Therefore, the rental market is confirming what many of us suspected – that the downturn in executive postings is a sign of an economy still greatly under-performing.

But let me return to those economists to whom I referred at the beginning of this report. The more optimistic among them are still predicting a turnaround in the fortunes of the economy early next year while others believe that the level of public and private debt in Britain is such that it may take until 2015 to get back to where we were in the middle of 2007. A change of government is unlikely to alter opinions. Historically, business confidence is usually given a boost when a Labour Prime Minister is replaced by a Conservative one, but this time the national deficit is so deep that whoever wins power will face tough choices.

So, by all means continue to keep an ear open for what economists have to say but it may be appropriate to also keep an eye on the residential rental market – as a weather vane it might just be one of the best economic barometers around.

DAVID ALEXANDER, Proprietor

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