One of the features of economics and economics life is that no matter how unlikely something is if it suits vested interests it will keep being reinvented. On that topic let us see what the Royal Institute of Chartered Surveyors or RICS has reported this morning.

Nationally, 61% felt landlords would exit the market over the coming year, while only 12% felt there would be a greater number of entrants. Moreover, for the next three years, 52% felt there would be a net reduction in landlords, with only 17% suggesting a rise.

Those of us who feel that the UK economy has been tilted too much towards the buy to let sector will be pleased at that but not the RICS which gives a warning.

Given the likely resulting supply and demand mismatch in this area, respondents predict that over the next five years rental growth will outpace that of house prices, averaging 3%, per annum (against 2% for house price inflation).

As to the deja vu element well let me take you back to November 4th last year.

Rents in Britain will rise steeply during the next five years as a government campaign against buy-to-let investing constrains supply, estate agencies have forecast.

Okay how much?

London tenants face a 25 per cent increase to their rents during the next five years, said Savills, the listed estate agency group. Renters elsewhere in the country will not fare much better, it said, with a predicted 19 per cent rise.

Whilst we are looking back to then there was also this.

JLL, another estate agency group, predicted a 17.6 per cent increase across the UK by 2021, with London rents rising 19.9 per cent, far outstripping predicted rates of inflation.

What has happened since last November?

If we look back I was very dubious about this and pointed out a clear problem.

If you look at the pattern of rental growth it follows the improvement in the UK economy with a lag ( of over a year which is another reason why it is a bad inflation measure) which means that it looks to be driven by improving incomes and probably real incomes rather than the underlying economy. Thus if you expect real income growth to fade (pretty much nailed on with likely inflation) or fall which seems likely then you have a lot of explaining to do if you think rents will rise.

In essence there is a strong correlation between income growth and real income growth and rental growth in my opinion. We now know that so far this has worked because back in November I pointed out that the official measure of rental inflation was running at 2.3% and yesterday we were updated on it.

Private rental prices paid by tenants in Great Britain rose by 1.6% in the 12 months to August 2017; this is down from 1.8% in July 2017.

Shall we check in on London?

The growth rate for London (1.2%) in the 12 months to August 2017 is 0.4 percentage points below that of Great Britain.

So we see that my methodology has worked much better than those in the industry as the phrase “vested interest” comes to mind. If you are struggle to predict capital profits ( house price rises) for your customers then promising some increased income (rents) works nicely especially at a time of such low interest-rates and yields elsewhere. The problem with this was highlighted by Supertramp some years ago.

Dreamer, you know you are a dreamer

If you look at the chart then it looks like the only way is down which looks awkward for the vested interests squad. Care is needed as it is a diverse market with rents in Wales rising albeit from a low-level and a variety of levels as shown below.

the largest annual rental price increases were in the East Midlands (2.8%),…….The lowest annual rental price increases were in the North East (0.4%),

But until we see a rise in real incomes then there seems to be little or no case for a recovery overall. At this point the UK establishment will be getting out the champagne as they will feel they put rents into the “most comprehensive” inflation measure CPIH at exactly the right time.

What about house prices?

As today is a policy announcement day for the Bank of England let us look at what house prices have done during the term of the present Governor Mark Carney. When he arrived in July 2013 the average house price in the UK was £174,592 whereas as of July this year it was £226,185 according to the Office for National Statistics. This replaced a three-year period of stagnation where prices had first fallen a bit and the recovered. So he has been the house owner and buy to let investors friend.

Some of the policy changes to achieve this preceded him as it was under the tenure of the now Baron King of Lothbury that the Funding for ( Mortgage) Lending Scheme was introduced. But Governor Carney could have changed course as he did in other areas. However he did not and I noted back then a fall in mortgage rates of around 1% quite quickly and the Bank of England later calculated a total impact on mortgage rates of up to 2%.

There are of course differences across the country as I looked at on Tuesday where the surges in London have been accompanied by much weaker recoveries all in other areas of which the extreme case is Northern Ireland  But the overall move has been higher and not matched by the lending to small businesses which the policy effort was badged as being for.

So if we now look ahead we see wage growth but real wage declines. We see that there has been an extraordinary effort to reduce mortgage rates from the Bank of England. There was also the Help To Buy programme of the government. All of these factors point to stagnation looking ahead and if anything the surprise has been that the various indices have not fallen further. Should London continue to be a leading indicator then perhaps more patience is needed.

The London* price gauge remains stuck firmly in negative territory, posting the weakest reading since 2008. Furthermore, the price indicator has turned a little softer in the South East of England,  ( RICS)


There are unknown factors here as for example we could see another wave of foreign purchases in London. The Bank of England could ease policy again however the power of Bank Rate cuts and indeed QE has weakened considerably in this regard. This is because if you look at countries like Sweden and Switzerland then with individual exceptions the bulk of mortgage rates hit a bottom higher than you might imply from the official negative interest-rates. This is in my opinion because banks remain unwilling to pass negative interest-rates onto the retail depositor as they fear what might happen next. So if the Bank of England wants to do more its action would have to be direct I think.

The other road that the Bank of England has been hinting at via its house journal the Financial Times is Forward Guidance about an interest-rate rise. Perhaps we will see more of this today and this is unlikely to support house prices as it would be the doppelganger of the last four years or so, especially of the “Sledgehammer QE” of August 2016. This means that today’s policy move could yet be putting Jane Austen on the new ten pound note. Perhaps the PR spinning around this will manage to put a smoke screen around the fact that there seems to have been a “woman overboard” problem at the higher echelons of the Bank.