STUART TROW: What would make it possible for UK millennials to buy homes?

Landlords rank somewhere between English football fans and politicians in terms of public regard. Love them or loathe them, however, they do have a unique perspective on that most British of obsessions, the property market.

In London especially, landlords have been battered by falling rents driven by Brexit and coronavirus lockdowns, but it could be that things are starting to look up. Unfortunately that’s bad news for the millennials still hoping to get on the UK’s steep property ladder. 

At this point I should disclose an interest, if only to establish my credentials as a minor authority on the subject. My wife and I are landlords, fully accredited and categorised as “professionals” by mortgage lenders. Furthermore, we manage the properties ourselves, which means we are in regular contact with a number of the people at the sharp end of the market, our tenants.

So what does our perspective tell us about the state of the property market? 

Two things stand out. First, none of the young couples who had hoped to take advantage of the UK’s generous pandemic stamp-duty holiday has been able to do so. The temporary relief from the property transaction tax has only served to push prices further beyond their reach and risk appetite.

As first-time buyers they were already exempted from the duty on most purchases up to €300,000. Extending that relief to all home buyers simply increased demand for the same limited supply of “affordable” property. Our tenants still classify themselves as “aspiring homeowners”, but they have scaled back their searches having been outbid on numerous occasions. The market is simply “too hot”, they say.

The second notable insight is that demand is returning in the London rental market with a vengeance. The double whammy of Brexit and lockdown caused a well-documented exodus of about 700,000 people from London in the year to February 2021. Rents in certain parts of central London are 24% lower than they were five years ago, reflecting the shift in favour of supply over demand.

With this very much in mind, we were cautious when a tenant recently moved out of one of our properties in a London neighbourhood that is marginally beyond the reach of the Tube, but well served by trains and buses. We marked the rent down by 10%, and were surprised to find ourselves inundated with prospective renters moving to, or across, London for new jobs. All those who viewed wished to take it.

Of course this is just a snapshot of one small corner of the market. But apparently we aren’t alone. Would-be tenants reported struggling even to arrange viewings. It would appear that the property market isn’t immune from the supply-chain blockages afflicting much of the rest of the economy.

In a crisis, rents usually rise because people are unwilling to stomach the wealth volatility of home ownership. After the 2008 global financial crisis median rents, as measured by the English house survey, rose by as much as 8%, even as the nationwide house price index dipped 17.6%.

So it was unusual that London’s rents fell in the recent lockdown-recession.

This demonstrates that, despite their loathsome reputation, landlords are nothing if not pragmatic. Rents exhibit little of the price stickiness seen elsewhere in the property market, where owners are famously slow to cut asking prices in response to a fall in demand. If rental demand falls, rents do too, if only to avoid the opportunity cost of an empty property.

This brings us back to our tenants struggling to scramble onto the property ladder. If the stamp-duty holiday failed to help them, what else possibly could?

It’s always tempting to introduce more policy measures, such as higher fees and taxes, to discourage landlords who are perceived to be behind the rise in property prices. Yet while such measures are popular, when viewed through the prism of supply and demand they serve only to reduce the supply of rental properties.

From an economic policy adviser’s perspective, this should not be a problem. If a “discouraged” landlord decides to sell, the ultimate buyer is usually another landlord, leaving rental supply intact, or someone who would otherwise still be renting, removing one aspiring homeowner from the market.

This overlooks a vital aspect of real-world tenant behaviour. Renters are far less likely to indulge in the luxury of accommodation any larger than is required to meet their immediate needs. That is why, according to the English housing survey, only 8% of under-occupied homes are private rentals, while 85% are owned by the people who live in them.

That means when landlords leave the sector, the reduction in supply does have an impact on rents. This is because the properties sold will house proportionately fewer people than the same unit if it were rented. So by all means make things uncomfortable for them. But if you really want to help tenants, do it by increasing the supply of decent, affordable rental properties, rather than forcing an exodus of private landlords.

If rents stabilise as a result, it will also reduce the upwards pressure on house prices. Perhaps then tenants will be able to decide for themselves whether to rent or buy, rather than have the decision forced upon them by misguided policy.

Bloomberg Opinion. More stories like this are available on bloomberg.com/opinion