Spiralling rents pose a tough question for Shapps: Where will the new homes come from?

Spiralling rents pose a tough question for Shapps: Where will the new homes come from?

The latest survey of the residential rental market by the surveyors’ body RICS is likely to wind up the pressure on the housing minister Grant Shapps to promote more house building.

The survey suggests that rents are rising ever faster, driven by rising demand in a market where supply is constrained, as the graph taken from the RICS survey shows.

Naturally London and the South East lead the charge with the overwhelming proportion of letting agents saying that rents are on the up. But across the country as a whole a majority of 42% of letting agents report rising rents.

Paradoxically, this comes at a time when real household incomes are falling. However the net result of rising rents will be a further squeeze on tightening budgets. Translated into political analysis this means “hitting voters in the pocket”.

What the survey shows is that the number of new landlord instructions had been falling as the economy and the housing market perked up from mid 2009. This is consistent with “reluctant landlords” selling their homes as prices bounced back and an easing in the buy-to-let market.

But in the latest survey that trend appears to have gone into reverse. The RICS measure of landlord instructions was still negative in January registering -3, but the April figure came in at +6.

This rise in supply, however, is piffling when compared with the RICS measure of demand, which has been on an upward path for more than a year and registered a rise to +35 in April. This suggests a large majority of estate agents were seeing increasing numbers of would-be renters coming through their doors.

There are many possible explanations for what is happening in the market at the moment and there will be many factors involved.

But one that should cause some concern for house builders is that the recent boost to landlords in the rental market may well be a reflection of a weakening appetite to buy.

This would certainly fit with the relative rise in the proportion of demand from private tenants, which on the RICS measure rose to its highest level since January 2009.

Here is a comment in the survey from Stuart Gray of Strutt & Parker in St Albans, pointing in that direction. “Larger properties (which have previously been difficult to let) are letting very well and achieving good rents. Lots of renters with cash from house sales offering chunks of rent (6 months +) up front in attempts to secure properties and incentivise landlords.”

There will meanwhile be some comfort for house builders in knowledge that rising rents do make buying a home relatively more attractive, certainly if one takes a short term view.

But let’s leave to one side the real world implications of rents becoming less and less affordable. For the Government, and Mr Shapps in particular, this is not good news.

The calls to build more homes and to provide more affordable renting can but grow and raise increasing questions about what the Government is going to do about it. These calls will be more pointed given the repeated assurances from Mr Shapps that this administration will build more than was achieved under “top-down-targets”.

So let’s examine the options in the private sector. Here expanding supply rests on an increase in demand for new homes, leaving aside the potential for a oost to institutional or buy-to-let investment in the new rental properties.

But the private sector is constrained by high house prices in relation to earning and the tightening of the mortgage market.

Practically, this situation can only be resolved by a swift fall in house prices, a surge in earnings or a more liberal mortgage market. The first could create potentially serious and unsettling economic waves, in the short term at least, the second looks markedly unlikely, but probably not as unlikely as an expansion in mortgage availability.

Without demand house builders will not build and they have rebased their businesses to build far fewer than they were before the credit crunch. In the main house builders are looking to rebuild their margins rather than increase turnover, so they will be selective over the sites they open.

I have argued before that there is a real threat that we might be condemned to low levels of private house building for the foreseeable future.

Meanwhile, in the social sector demand is exceptionally high. But supply will be held back by two main factors: reduced public funding and renegotiations of the section 106 agreements made with developers to reduce the proportion of social rented homes within planned schemes.

I’m hearing that there is plenty of anecdotal evidence that, on the ground, developers are increasingly looking to persuade local authorities to cut the number of affordable homes or to change the allocation of affordable homes from social rented to low-cost home ownership.

The argument put forward by the developers is that without diluting the impact of the section 106 agreement, the scheme in question would not be viable and so would not be built.

Developers will no doubt be seeking to sweeten the pill by pointing to the New Homes Bonus that would be due to the local authority if the development proceeds. This they might argue would offset losses to the benefits written into the section 106 deal.

The upshot is that all the evidence points to fewer homes built for renting in the social sector while new build in the private sector highly constrained by demand.

In the face of this huge and growing crisis the main thrust of attack by the Government is aimed at the planning system.

That said, it is fair to say that we have seen some move to promote home buying with policy backtracking in the form of the FirstBuy scheme, which is broadly a diluted HomeBuy Direct.

But the rhetoric is all wrong. Talk of “top-down-targets” or for that matter Whitehall’s grip on public land is an irrelevancy.

The planning system might have been regarded as the main constraint on house building before the credit crunch and it might again become the main constraint in the future.

But the real battle to build more homes now is not being fought in the corridors of local authorities.

The fight now is to find enough finance to build homes, either through the private sector by way of mortgages or institutional investment, or, dare I say it, from the public purse.

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