David Alexander comment: Take “soaring” rent estimates with a pinch of salt

David Alexander comment: Take “soaring” rent estimates with a pinch of salt

Last week the print and broadcast media were flush with another “soaring rents” story, this one given more credence than usual as it came from the latest quarterly market survey by that august professional body, the Royal Institution of Chartered Surveyors (RICS).

The RICS predicts that, across Great Britain, rents will rise by an average of 15 per cent over the next five years, largely as a result of landlords leaving the sector and there being insufficient new entrants to plug the gap. “Significantly, the drop in instructions is evident in virtually all parts of the country to a greater or lesser extent,” the organisation noted.

The principle reason for this withdrawal is the higher rate of stamp duty (LBTT in Scotland) on property purchases that are not the main home, plus corrections to taxation and buy-to-let mortgage relief which has left landlords across the country worse off. Additional rates of income tax levied at Holyrood (for all but the lowest earners) have not helped landlords in Scotland, either.

So where does that leave us, especially given that the survey identified that, over the next three months, landlord instructions will fall more in Scotland than most of the English regions?

Well, encouragingly, this could kick the idea of rental controls in various so-called “hot spots” further into the long grass. Recently, I alluded to the fact that local councils had quietly put introducing these measures on the back-burner because of a shortage of staff. But with rents likely to rise, because fewer landlords means fewer properties to let, rent controls would seem to be even more counter-productive.

Why inhibit rent rises when the reason for them happening is a shortage of stock? Surely rent controls will be a further disincentive to landlords, increasing the chances of more withdrawals from the market, leading to an even greater shortage. Allowing rents to continue to reach their natural market level will encourage landlords to remain and help maintain a reasonable level of supply and demand.

As for “soaring” rents, this term was used by the media. For its part, RICS simply stated that “rent forecasts edge up”. This seems more accurate given that an average rent increase of 15 per cent over five years equates to an average of 3 per cent per annum. So, with annual inflation at around 2.5 per cent, landlords are hardly going to coin it in. The good news for landlords is that these figures suggest income from rents will be maintained and, coupled with capital appreciation, the overall return from a £150,000 property will continue to be significantly higher than from the same sum invested in the highest-paying fixed bond available from a building society. This may change as the bank base rate rises, but most experts believe that last week’s increase from 0.5 per cent to 0.75 per cent is not the start of regular increases and that it may be several years before it returns to even 2 per cent.

It should also be noted that the RICS prediction relates to a UK average in which there are, of course, many differences. The rental market in central Edinburgh, for example, bears little reference to its equivalent in Bathgate.

One development that may have a negative effect on rents in some parts of Scotland is the UK’s departure from the EU next year. Presuming this also ends freedom of movement, the main sources of demand – from Eastern Europe – will dry up. However, it is likely that EU citizens already settled here will have the right to stay, so I do not anticipate any mass withdrawal of tenants from that sector.

Indeed, if the economy continues to grow, so will the market. In Edinburgh especially, much of the “inward” demand for rented accommodation comes from nearer home (other parts of Scotland plus England, Wales and Ireland) as well as people from countries outside the EU.

This article originally appeared in The Scotsman on 9thAugust 2018 titled “David Alexander comment: Take “soaring” rent estimates with a pinch of salt