Britain in 2020: A nation of landlords and renters

The UK housing market crash has had one unpredicted and unmistakeable consequence in creating a massive and near-unprecedented rental and buy to let boom across the entire country. But will this become a permanent shift in the way Brits think about property ownership?

For those that don't know, the UK housing market crash has had one unpredicted and unmistakeable consequence in creating a massive and near-unprecedented rental and buy to let boom across the entire country. But will this become a permanent shift in the way Brits think about property ownership?

The UK rental and buy to let sectors have always been strong. Before the crash the rapid escalation in prices was pricing more and more people - especially first time buyers, the lifeblood of the housing market. So, even before the crash the UK housing market was seemingly turning more to rentals, although then the trend was much more pronounced in London, and places like Edinburgh and Aberdeen, than anywhere else in the UK.

By the height of the UK housing market crash in late 2008/early 2009 (depending on what index you read) prices had crashed by around 20% on average in the UK, and by much more in many places. A housing market crash is called a correction, not just because it sounds better in estate agents' press releases, but because a crash is usually a direct result of hyper-inflation, which creates a bubble out of overvaluation and un-affordability.  So a crash usually brings the asset class back to fair-value and affordability, thereby correcting the market's problem.

But, for a couple of reasons this correction did not correct the market's problems. Previous UK housing market crashes had brought house prices down to about 3 times the average salary, but when the dust had settled UK house prices were still 4-5 times the average salary, and they still are now.

Looking at the Halifax historical house price to earnings index, and comparing it to historical house price data, we can see that the UK housing market has periods of steady growth, followed by a flat period which corrects the growing imbalance and keeps the HPER index around the 3-3.5 times mark. But then the trend is for a rapid period of growth that pushes house prices to over 5 times the average salary and soon after that a sharp correction (decline).

The last severe crash brought the HPER index down from 5 times in May 1989 to 3.10 when growth started slowly in September 1996.

The HPER index then stays below the 3.5 mark until December 2001 when the next period of rapid growth begins in the house price data. By January 2005 the HPER index is at 5.20%. The house price data shows rapid growth continuing until the first quarter of 2007, by which time houses are 5.8 times the average salary (Apr 2007). But the house price data then shows the sharp decline lasting until only Q1 2009, the HPER index was still at 4.39 times in Apr 2009. Ironically the last hard data in the HPER index shows it again at 4.39 in Sep 2011, with projects for 4.44 times in Oct and 4.39 in November.

That is hard data showing that the correction had failed to correct the problem in the traditional UK housing market, where people aspired to own their own home. And that is only half the story. At the same time the banks had taken a hammering; hardly any first time buyers had good enough credit to get a mortgage, and of those that did few could raise the 10-20 percent deposits required to do so. This made the affordability problem even more pronounced in first time buyers, and the lack of first time buyers of course makes it difficult for those on the first rung to climb any higher.

As a result more and more people have and are being forced to accept renting as not only their best, but in many cases, their only option.

At the same time you have the thousands of people who lost their homes to repossession. Obviously mortgages are out of the question for those who have just had their home repossessed, and so this added to the pool of renters looking at renting as a long term option.

Of course, you have the housing mathematicians pointing out that buying is by far the better financial option. But until the problems stopping people from buying are corrected, which probably includes another sharp decline, or a long period of stagnation, up to and including the point where wages actually start growing again.

At the same time renting has its advantages: renting is much more versatile, which is a definite plus in today's jobs market. A person who rents can easily move around to stay in work. What's more the huge problem of rogue landlords is becoming far smaller.

Of course landlords (AKA buy to let investors) are benefiting hugely from the current situation. But, after all the bad press today's landlords are mostly professional businessmen, running rental properties as a business. Thus, it is in their best interests to keep their tenants happy. On top of that decades of regulation mean there is little room for the rogues anymore, and it is now much more cost efficient to keep a rental property in a constant state of good repair.

With landlords now a new breed, and the "long-term" position looking like a thing of the past in today's modern world, who's to say that the recent kick-up-the proverbial won't become a permanent change in the way UK residents look at putting a roof over their head. 

- Tuesday 20 December 2011

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