News Review: Economics


My rented home is my castle may be the future


by Fionnuala Earley, UK consumer economist, Royal Bank of Scotland


the proportion of households in the private rented sector has been increasing in the uK for more than a decade. this is partly because of the decline in social renting, but the proportion of households in owner-occupation has also been falling since 2005. Some 16% of uK


households are now renting privately, compared with only 10% 10 years ago. another 17% rent from the social sector. With affordability and credit conditions still tight it’s likely that the uK’s proportion of renters will increase further. this could be good news for landlords, but could the uK end up with almost half of households renting as is the case in germany? You might think that is too


far a stretch, but that could be based on the common myth that the uK has one of the highest rates of owner occupation in europe. in fact, out of the 12 major european countries, the uK ranks seventh, behind the southern european countries, ireland and Belgium. and the owner- occupation


rate in the uK has fallen - from 71% ten years ago to 67% now. Social renting rates have fallen over the last decade too, and it’s the private rented sector which has taken up the slack. But how much bigger the private rented sector may become, and for how long, depends on several


factors, which some european comparisons may also shed some light on. the uK ranks more highly


in terms of the proportion of owner-occupiers who own with a mortgage, rather than outright. only about a quarter of owner-occupiers in the uK live in a mortgage-free property, compared with 80% in italy and greece. this is striking because, in


the uK, we tend to think of cash purchases as being only for the wealthy or for those trading down at the end of their housing career. But in other parts of europe it’s far more complex than that. mortgage-financed owner- occupation is less popular in southern european countries, partly due to the embedded culture, but also because historically, finance systems have been less well developed. But it’s also true that when


finance is freely available, house prices increase more rapidly, which causes affordability to deteriorate and increases the need to borrow to buy property. this certainly seems to have been the case in the uK during the boom years and it’s at least part of the reason why we are surprised - and a teeny bit jealous - of people who are able to buy outright with cash. a comparison with germany, where credit is more difficult to obtain, would also seem to support this. if finance is less available,


it will hinder opportunities to enter, or remain in, owner occupation, reduce the owner occupation rate and increase the rental rate. But we know that home-ownership is still,


24 mortgage introducer JULY 2011


by far, the preferred tenure in the uK. So when conditions improve, demand should return too. the length of delay will depend on house price movements, earnings growth, savings rates and financial help available from elsewhere. How close it will return to its previous level will depend on the relative cost and any change in aspirations or attitudes towards renting. if preferences change dramatically, the rental rate in the uK could get much closer to those in France and germany.


A matter of age Just because it’s more difficult to become a homeowner doesn’t mean that life stops though. Population estimates suggest large growth in the 25-29 age group over the next five years and not all of these youngsters will be willing or able to stay with their parents. But as credit conditions


or affordability are likely to remain tight for some time, relative to 2007, demand for accommodation from this age group will be skewed towards private renting. this is good news for landlords and those wishing to enter the buy-to- let market. gross rental yields have


been on an upward trend since 2007, largely because of house price falls, but higher tenant demand in the face of relatively limited supply has raised rents more recently. this, along with the rise in prices in 2010, has improved total returns to landlords. actual rental data is poor and


there are large discrepancies between different sources.


For example, data from the retail Price index suggests current rental inflation of around 1.5%, while various commercial sources suggest rent inflation closer to 5%. But all sources show rents have been increasing more rapidly since Spring/Summer 2010. Looking forward to where


returns may be over the next five years, conditions look relatively good. assuming a conservative long-run average year-on-year rental growth of around 2.5%, if house prices fall modestly in 2011 and stay broadly flat in 2012, followed by low single digit rises thereafter, gross yields would increase to an average of around 4% up to 2015. this is not a great return


compared with some alternative


investments,


although better than cash. But if house price growth is taken into account, total returns compare more favourably. For example, annual total


returns by 2015 with the same rental growth would be 7.9% - a much more attractive proposition for investors with longer time horizons. it’s still unlikely that the


level of renting in the uK would reach those in France and germany. Wanting to be a homeowner


is still very much part of our culture. But while property remains expensive, earnings growth low and the availability of finance more cautious than it was, the difference between wanting to be, and being able to be, a homeowner means the prospects for the buy-to- let and private rented sector look relatively bright.


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