Rent rises could soon outpace house prices, warn surveyors

mwpt

HAMISH_MCTAVISH wrote: »

The pressure is certainly on landlords to increase rent in a way it hasn't been until now.

From the calculator that's now available online to measure the changes, a typical landlord would need to get rent up by around 25% to 30% by 2020 to retain their current profit position.

So that means landlords who might previously have been content to leave a long term tenant in on an lower rent will feel pressure to start raising rents to market level more quickly.

And with the new measures discouraging BTL new entrants, existing landlords will have the upper hand as the shortage of rental properties grows.

I sort of see the point in Osborne's thinking re a tax grab, landlords are an easy target, but from an economics and housing shortage perspective this is little short of madness.

I have no hard idea on what will happen, but you guys certainly seem to. So just to provide a bit of balance, I'm going to play devils advocate and raise an objection.

Tenants do not have infinite ability to pay more. At some point they will simply cease to do so and move elsewhere, in the town, in the country, in the continent, in the world. The idea that you can simply keep rising rents indefinitely to retain current margins is provably untrue. But none of us really knows at what level you can no longer do so. You're assuming that you can do so at this point, do you have any hard reason to believe that?

When other businesses face a new tax or increased prices, sometime they raise prices but often competition forces their profit margin down. Dividends (yields) are cut to the shareholder in extreme cases. Is there a reason why profit margins cannot fall for landlords? If some BTL investments become unviable, could this be a sign that the asset was/is over priced and they will have to sell up, rather than that they can simply raise rents further?

chucknorris

mwpt wrote: »

I have no hard idea on what will happen, but you guys certainly seem to. So just to provide a bit of balance, I'm going to play devils advocate and raise an objection.

Tenants do not have infinite ability to pay more. At some point they will simply cease to do so and move elsewhere, in the town, in the country, in the continent, in the world. The idea that you can simply keep rising rents indefinitely to retain current margins is provably untrue. But none of us really knows at what level you can no longer do so. You're assuming that you can do so at this point, do you have any hard reason to believe that?

When other businesses face a new tax or increased prices, sometime they raise prices but often competition forces their profit margin down. Dividends (yields) are cut to the shareholder in extreme cases. Is there a reason why profit margins cannot fall for landlords? If some BTL investments become unviable, could this be a sign that the asset was/is over priced and they will have to sell up, rather than that they can simply raise rents further?

I think it'll be a bit of both, rents rising partly recovering additional costs, but not enough for highly leveraged landlords who will/may have to suck up the rest. I don't want to chase the max possible rent anyway, I'd rather have an easier life.

Graham_Devon

HAMISH_MCTAVISH wrote: »

From the calculator that's now available online to measure the changes, a typical landlord would need to get rent up by around 25% to 30% by 2020 to retain their current profit position.

So that means landlords who might previously have been content to leave a long term tenant in on an lower rent will feel pressure to start raising rents to market level more quickly.

It's not that simple though.

The tax changes will mean different things to all landlords. While one landlord may need to raise rents 30% to maintain their position, the landlord next door may not have the same need to raise rents at all.

It all depends on their personal debt position. There is a thread on Property118 discussing this on s small level. Landlords who are not planning to put up rents are being encouraged to do so to help other landlords out. They seem to get the fact that their prices will be at the higher end of the spectrum unless all landlords increase rents. Some simply don't need to, have good tenants and would prefer to keep them.

So the landlord that needs to raise their rents by the full whack suddenly finds their price is un-competitive in their area. So what do they do? Insist on charging that rent and finding they have no one to pay it? Pretty silly game.

The danger in all these discussions is that we assume that every landlord has been hit to the full extent and all will whack up rents a similar amount. We need to remember that many landlords own their properties outright and are not impacted in the same way as the over-leveraged landlords many of you are discussing.

It may be that landlords think they can just pass on costs at a whim and their tenants will simply hand over more cash. But in the real world other factors apply.

"We" seem to have this perverse idea that all the factors that relate to any other business whacking up prices simply don't apply to landlords. I personally think thats a very naive viewpoint. If it were as simple as some make out, no company would ever go bust, as they would simply jack up prices.

wotsthat

mwpt wrote: »

When other businesses face a new tax or increased prices, sometime they raise prices but often competition forces their profit margin down. Dividends (yields) are cut to the shareholder in extreme cases. Is there a reason why profit margins cannot fall for landlords? If some BTL investments become unviable, could this be a sign that the asset was/is over priced and they will have to sell up, rather than that they can simply raise rents further?

The only thing for certain is if there is an increased cost which can't be avoided them someone has to pay it.

It'll be shared between tenant and landlord in a ratio to be decided by the market. The changes are quite complex and target only certain groups of landlords so it'll be interesting to see what happens.

My guess is tenants will be picking up the bigger proportion of the increased costs. There's already a shortage of housing and the government are deterring new entrants to the rented sector. Some landlords will go bust to much rejoicing but existing landlords in it for the long term who aren't over-leveraged have been handed a gift.

Don't worry about tenants not being able to afford it - they'll have to share in higher densities.

mwpt

wotsthat wrote: »

Don't worry about tenants not being able to afford it - they'll have to share in higher densities.

You really think so? Any stats on people per dwelling over the years? At what point do they simply stop doing this and move elsewhere, and are we at that point, and how do you know?

kinger101

mwpt wrote: »

I have no hard idea on what will happen, but you guys certainly seem to. So just to provide a bit of balance, I'm going to play devils advocate and raise an objection.

Tenants do not have infinite ability to pay more. At some point they will simply cease to do so and move elsewhere, in the town, in the country, in the continent, in the world. The idea that you can simply keep rising rents indefinitely to retain current margins is provably untrue. But none of us really knows at what level you can no longer do so. You're assuming that you can do so at this point, do you have any hard reason to believe that?

When other businesses face a new tax or increased prices, sometime they raise prices but often competition forces their profit margin down. Dividends (yields) are cut to the shareholder in extreme cases. Is there a reason why profit margins cannot fall for landlords? If some BTL investments become unviable, could this be a sign that the asset was/is over priced and they will have to sell up, rather than that they can simply raise rents further?

30 years ago, it would have been uncommon for someone in their late thirties or forties to be renting in a house share. Now, that's very common in London. 30 years ago, a graduate starting a job in the City of London would have turned their nose up at Barking. It's really not that hard to envisage rents increasing in London. Expectations of what you get for your money can decline rapidly.

Graham_Devon

wotsthat wrote: »

Don't worry about tenants not being able to afford it - they'll have to share in higher densities.

Not quite that simple.

You are treading down the path of HMO's. That's a different ballgame altogether.

It's OK saying people will just have to share in higher densities, but you can't simply ignore all the extra responsibilities such as fire regulation that then land in the landlords lap.

mwpt

kinger101 wrote: »

30 years ago, it would have been uncommon for someone in their late thirties or forties to be renting in a house share. Now, that's very common in London. 30 years ago, a graduate starting a job in the City of London would have turned their nose up at Barking. It's really not that hard to envisage rents increasing in London. Expectations of what you get for your money can decline rapidly.

So we're not at that point yet in your opinion. Appreciate the view.

Btw, are you a BTL landlord?

westernpromise

mwpt wrote: »

I have no hard idea on what will happen, but you guys certainly seem to. So just to provide a bit of balance, I'm going to play devils advocate and raise an objection.

Tenants do not have infinite ability to pay more.

No, they just pay the same money but accept less property for it. 2-bed in grotty area instead of 2-bed in decent area; or 1-bed instead of 2-bed; etc.

At some point they will simply cease to do so and move elsewhere, in the town, in the country, in the continent, in the world. The idea that you can simply keep rising rents indefinitely to retain current margins is provably untrue.

I disagree. In 1989 - 1992 landlords raised rents. Tenant distress was similar to OO distress.

When other businesses face a new tax or increased prices, sometime they raise prices but often competition forces their profit margin down.

The competition to renting is from owner occupation. If that gets more expensive, so does renting, historically, and vice versa.

Graham_Devon

westernpromise wrote: »

No, they just pay the same money but accept less property for it. 2-bed in grotty area instead of 2-bed in decent area; or 1-bed instead of 2-bed; etc.

Which creates huge demand for the grotty areas.

But a void in the better areas. Who fills this void if the void is created by renters not being able to afford the rent?!