London rents surge, but why are landlords miserable?

[LONDON] Something weird is happening to the London property market. House prices have risen by just 1.7 per cent over the past year, but rents have climbed by 9.1 per cent. So what gives?

The landlord exodus story, which we’ve been hearing about for years, has evolved into a quantifiable phenomenon and London, where rental yields are traditionally among the lowest in the country, is at the sharp end.

In noting that the proportion of newly listed properties for sale nationwide that were formerly rented has increased to 15.6 per cent from 9.8 per cent a year earlier, property data specialists TwentyCI report seeing “landlords exiting the market en masse.”

Unsurprisingly there are also fewer properties available to let, down 16 per cent in the first quarter compared with the same period last year. What was previously a hypothetical worst case is now being reflected in the data with rental costs in the capital now around 40 per cent higher than before the pandemic.

Rapidly rising rents should draw investor capital toward the lettings market and away from the owner-occupied sector, easing the deficit of property buyers and addressing the shortage of rentals. But new environmental rules have undermined the laws of economics. 

From 2028, all properties let under new tenancies will have to meet a minimum EPC (Energy Performance Certificate) rating of C (on a scale of A to G at its worst). Currently, only 40 per cent of rental properties meet or exceed this threshold. Moreover, achieving this goal will become harder with an even tighter EPC framework set to be announced late next year.

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Those landlords choosing to sit tight face a financial as well as regulatory risk with the only thing certain about the new standards being the fines for non-compliance. Not having an EPC can cost a landlord up to £5,000 (S$8,733) and a failure to address hazards can cost them as much as £30,000.

While the same energy ratings are applied to owner-occupied homes, you don’t have to improve the energy efficiency of a property to sell it. Since upgrading to the requisite C standard is likely to cost landlords between £10,000 and £40,000 (and many rentals are too inefficient to be remedied), there is a clear financial incentive for landlords to sell to owner-occupiers. A property with an EPC rating of worse than C is worth more to an owner-occupier than it is to a landlord.

Viewed across the country as a whole, the consequences are becoming quantifiable, not just in terms of rising rents, but diminishing supply. The volume of properties to let across the UK as a whole has hit an all-time low of 284,000, down 18 per cent over the past year and 23 per cent lower than immediately before the pandemic.

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So while the story can be nuanced, the drop in rental supply has transitioned from anecdote to hard reality, yet the measures exacerbating the problem have also escalated. Only a small minority of renters are in a position to take advantage of the rise in home affordability. Most remain trapped in a shrinking market with few, if any, options. Huge net migration only exacerbates the dilemma. 

Since the government has acted to prevent the free flow of private capital from owner-occupied housing to the rental sector, it’s responsible for resolving the most obvious gap in the UK property market: affordable rentals.

Unfortunately, cash-strapped local councils and not-for-profit housing associations, who provide the bulk of affordable rentals, have also been selling homes to meet the rising cost of updating their stock, adding to tenants’ stress. Policy and property are therefore moving in the wrong direction fast, and it’s largely misguided government interference that’s to blame. BLOOMBERG

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Stuart Trow is co-host of “Money, Money, Money” on Switch Radio and author of “The Bluffer’s Guide to Economics.”