Supplement 14 Apr 24 – An alternative perspective on the rental sector

Apr 14, 2024

The optimist sees the donut, the pessimist sees the hole.” – Oscar Wilde

Before we crack on, some exciting news – 27th April is the day of the first of a series of in person Social Housing Events that Partners in Property are organising. There are 7 speaker slots in total covering every aspect of social housing. Attendees will be able to walk away with all the nuts and bolts they need to decide whether you want to incorporate social housing within your own property portfolio. The agenda will include:

  1. Why Sue Sims started in social housing as an investor more than 8 years ago
  2. Wayne Millward the founder of Room Match will be outlining all the due diligence you need to undertake, when deciding on which social housing provider to work with
  3. Mark Turner, COO at the Housing Network will be talking about the future of social housing
  4. A social housing expert mortgage broker will confirm exactly what you need to provide and take into account when you’re looking for funding for social housing. 
  5. Pinder Singh Dhaliwal, MD at Falcon Insurance will give you an overview of how to insure your property that is leased to a social housing provider. 


Early bird tickets are available at this link: 

Also I would like to share that I’m very excited by our upcoming Property Business Workshop which is happening in a week and a half. Rod Turner and I will be covering due diligence, mergers and acquisitions, and joint ventures – with some real life case studies of deals we’ve done – the good, the bad and the ugly. The tickets for the workshop are here – the date is Wednesday 24th April, and if you haven’t booked your ticket yet, please grab the last 1 – there’s only 1 left now! 


Welcome to the Supplement, everyone. With Easter out of the way, the macro news wheel kicked back in, with some tougher consequences than March’s news as a whole. When it appears I’ve been right about something I do have two competing feelings – firstly, self-validation of course (I’ll accept ego, if you prefer) – although it gives me no sense of satisfaction or self-fulfilment other than to remind me that the level of work and dedication I put in to being a better forecaster than the financial/economic press, and often the market – and secondly, moroseness to an extent because at least 50% of the time in the past 12 months it seems my predictions have swayed towards critiquing the market for being too overconfident. 


Macro’s busier week was definitely not all happy talk, although one week is just that – there are 13 of them in each quarter and 52 of them in each year! Q1 ended with a bang nailing down the economic growth we needed (news yet to officially come, granted, and consumption being such a massive part of GDP and quite hard to measure or quantify in advance – but certainly business sectoral growth). Q2 has not started with the same vigour. 


I’ll remind you of my treacle analogy at the beginning of 2023 – are we back there, have we progressed since then – well, we definitely have. We had inflation finding its top and needing a major haircut to come down to anything acceptable. I’ve said a number of times, the only problem with 4% inflation as a “soft target” (and actually, 3.5% or 3% looks a lot closer to the potential truth) is that any inflationary events (especially in an economy which basically relies on imports for its energy) send inflation to 6-7% quite quickly, which is again deemed out of control and puts the UK at risk of international investors not taking us very seriously or seeing us as a safe custodian of their money (which we rely upon for our bond market price-setting, which in turn sets our mortgage rates). 


So we are definitely not in a “start of 2023” sort of malaise. If anything, the growth we haven’t had since Jan 23 should – with the tax changes for the individual, plus the relative stabilisation of yields, still around 90bps lower than last years’ highs – see us in better shape to move forwards as an economy and a housing market.


However – every week that goes on in 2024 brings us ever closer to that election, that will freeze the intentions of the housing market – or at least suppress activity. What we are seeing is a very close parallel in terms of listing numbers to 2019, which was a flat market (which, incidentally, we found excellent for trading conditions in terms of acquiring stock) – the chief differences are the underlying interest rates (of course), the higher increases in wages (which should help drive prices), the higher inflation (which will drive prices by definition), and the ever more significant lack of stock issue which cannot help but drive prices. We are down to the difference being a couple of per cent, or a few per cent, in most of those metrics – but all in favour of 2024 being a better nominal price market than 2019.


Anyway – enough pre-summary – we are on to the Macro before I take a closer look at the output from the Resolution Foundation who have done some work on rents. I am ever more interested in the output from the Foundation because they do, without being too overly political (listen – they lean left, but most economists do almost by default), they provide some of the better analysis of what the average worker contends with particularly, it seems, at the younger ages – which is a fairly good proxy for the rental market in general.


A choice of four macro areas then – the bond and swaps are inevitable, and come last as our anchor of the four – we can’t avoid a conversation around February’s GDP figures and the underlying growth in some sectors of the economy, The RICS house price balance needs to feature, and also the BRC retail sales monitor as one of our better consumption proxies. 


GDP first. A huge fanfare as we hit the monthly consensus and another 0.1% of growth. Also – January has been revised to +0.3% rather than +0.2%, which is not a massive surprise as a lot of the metrics that normally struggle in January did not do so. It is a strange consumption pattern that I am still struggling to get my head around, to be honest, as January is normally particularly lean. 


The 3-month figure then is now +0.2%. Services grew 0.1% in February which seems in line with the PMIs observed, and also grew 0.3% in January following the revision (no surprise that a revision in services led to the same number being printed for the nation’s GDP), and the services 3-month figure matches the +0.2%. Production output was particularly helpful – growing 1.1% in February – but construction output was down a pretty massive 1.9% on the month. This is worth a closer look of course. Much smaller portions of the economy than services, but still significant implications for readers and listeners of the Supplement!


I’d draw one thing out of the services breakdown first – a 3.6% increase in sports activities, amusement and recreation activities over the 3 month period. A sign, I think, that the cost of living crisis was indeed abating significantly from the back end of 2023 (as identified here at the time). 


So – construction. New work down 3% over the previous quarter – typical winter, maybe. Repairs and maintenance up 1.6% – again, perhaps, typically. However – when you look at the breakdown, private commercial new work was down 4% on the month. The weather gets the blame (well, this is Britain, folks) – but in typical ONS style they do quantify that February in the Southern half of the UK (which has the bulk of the construction activity) there was more than twice the average rainfall, and it was the fourth wettest February on record. So – perhaps we can park this and expect that to mean delays, not a real issue in the sector. We will know in a month or so!

Onto the RICS house price balance. One of the better temperature taking metrics alongside looking at the efforts of Christopher Watkin for the real time health of the retail housing market. It only lags the previous month by a couple of weeks, and so keeps my impatient nature somewhat at bay. We moved to -4%, our best print since October 2022 which was in the middle of a cycle where we dropped from +61% in July 2022 (hot as hell, and needing cooling – and we’d been around +60 since September 2020, so this was definitely approaching bubble territory) to -42 by the end of 2022 – so H2 2022 saw a 103 point drop in the balance (bear in mind the top score would be +100 and the bottom -100, on paper anyway). The Lettuce can take a bow for some of that, but not all (she wasn’t in charge in August 2022, for example). She definitely influenced the speed of that drawdown in the measure, though, because of what she did to the interest rates alongside her partner in crime, Mr. Kwarteng.


I’ve said a few times this year so far – cautiously optimistic. That’s what -4 sounds like. Stable – that’s a word (it still feels wrong to use it after the terrible usage of the “strong and stable” trope during the limp Theresa May election campaign of 2017) that we haven’t seen often enough in the past 4 years. 

The reading of respondents citing an increase in new buyer enquiries in March was +8%, the best reading since February 2022. +13% cited new listings, though, meaning that listings need to stand out or offer good value to sell. +46% expect sales activity to rise over the next year – although it was a limp 2023, so don’t get overexcited by this.


Tenant demand reads +19 (all of these metrics are positives minus negatives, just to clarify). Landlord instructions reads -19. That’s a good snapshot of where the rental market is still at. Rents to move up reads +34 (so that would be 67% saying rents up, 33% saying rents down or sideways). 


RICS also alluded to the launch of the inquiry into the home buying and selling process, which I would expect to make some recommendations for improvements. Home information packs or home reports like Scotland – this is turkeys voting to eat goose for Christmas of course as far as the RICS are concerned, so we know what they will think, but we do also know that the current process is pretty rubbish, let’s face it, so improvements will be welcomed.


My third choice for this week – the BRC retail sales monitor. The British Retail Consortium number printed a very healthy 3.2% – but, warning. This is largely Easter Sunday falling in March not April. Next month will right that anomaly in the figures. Remember, also, that these are not “real” figures, they are just nominal. I.e. it is reasonable to suggest they just about kept pace with inflation (which is an improvement on last year). However, understand that retail will be facing more pressure than many other sectors with massive minimum wage increases, as a higher proportion of the jobs are at minimum than many other sectors – and that total employer cost increase of over 11.5% in April is going to hurt. 


When you drill down, the only growth is in food sales (6.8%). Non-food is down 1.9%. Online has also not been growing year on year – possibly the last throes of the pandemic shaking their way out of the system, but at some point the pandemic ceases to be the reasoning (it will have much longer shadows in the health of the nation, both physical and mental, of course). 


The commentary was positive but overall, the sector still looks relatively beleaguered. Those working in it at a senior level are just used to it by now, I think!


Onto our flagship “sweat” in that case – the bond and swaps market. And it was a sweaty one. I posted in midweek with my usual loquacious style on one particular social media platform – simply the crying face emoji.


There were two incidents of note particularly this week. The USA missed their consensus figures on inflation by 0.1% on both CPI and core. Doesn’t sound like much, does it – but CPI in the US was already expected to rebound from 3.2% in Feb to 3.4% in March – and instead printed 3.5%. Core is still above this, printing 3.8% (which was steady, but expected to decay to 3.7%). The world is still pretending that 2% is the target, of course, but when you owe $34.65 trillion, don’t tell me you don’t love a bit of 3.5-4% inflation – it would be a lie. The US markets therefore hardened on the bond yields, and so did ours.


Having mourned 0.1% last week I think I’m entitled to mourn 0.2% this week – the other incident of note (aside from comparative positivity in the economy, as discussed in the growth figures – the 0.1% growth was expected for Feb but the revision for Jan was not) was the Bank of England hawks – or the “transitionary hawk” that is Megan Greene (I know, you shouldn’t have favourites, but she is mine as far as the MPC goes) – following up on Jonathan “Hawk” Haskel’s chat from before Easter. The soundbyte that made it out into the media was that anyone betting on rate cuts in the summer are “making bets in the wrong direction” as any easing is “some way off”. 


The markets now suggest base will be 4.75% by the end of this year (my range was 4.5-4.75 but I’m wondering whether it could be 5% or even 5.25%, we will have to await the CPI rebound after April’s print is a low one). This, however, is where we may diverge a little (and I don’t remember the last time I disagreed with Megan Greene).

Here we go. She said “following surprisingly strong US March CPI, markets now expect that the Bank of England will cut rates earlier and by more than the Federal Reserve this year. Macroeconomic fundamentals and inflation dynamics differ in the UK and the US, and there’s a greater risk of persistence in the former.”


Now listen – I have to say this. She is smarter than me, more well qualified than me, and has a great handle on the USA as an American citizen. And – she’s right, in terms of textbook answers – I’ve said it myself a number of times throughout this inflationary cycle. Historically, the UK runs hotter than the US. HOWEVER. The US money supply increased by 40% in a period of around 2.5 years, during and perhaps just after the covid pandemic (depends if you go on WHO declarations, or when you really think it was under control looking back at the numbers). In the UK it was more like 22%. 


The UK inflation over that period has also now shaken out at around 22.7%. The US is nowhere near that 40% number (21%). That’s what a fully-paid up monetarist would tell you, and the correlation between the two graphs is rather irresistible to throw that argument out completely. That doesn’t ever seem to make it into any of the Bank of England’s rhetoric. So – I’m going to disagree here. The US has a much bigger secular inflation problem than the UK.

The UK’s problem will SOON be getting the patient off the operating table. However – that’s what SHOULD happen, not what WILL happen. Wages are sticky – they are unlikely to come down in nominal terms. The price of many things are also sticky. Let alone the fact that Oil has gone back over $90 a barrel, which influences travel and transportation costs of course. It’s up about 6% on the month but – to wheel out the phrase one more time – the risks remain to the upside at the moment.


So – the actual week on the gilts, anyway (I digressed, as I am wont to do). For the 5-year, our poison of choice. We opened at a hopeful 3.88%, and traded up to near 4% in the midweek, but decayed back to 3.9% as we went for lunch on Wednesday. The US inflation figures came out at 1:30pm, and so we jumped very quickly above 4%, closing around 4.05%. Megan’s commentary hit the headlines, and we jumped to test 4.15% but closed Thursday at around 4.11%. The swaps closed Wednesday at 3.964%, preserving that near 10-bp discount to the gilt rate – and expect this discount to continue, as mortgage demand will stay lower on the back of this news. 


Remember my fair value range, which I am still not inclined to update, was 3.5-4% for the year with a 0.25% “expansion vessel”. We are in the vessel, again, for the second time to my reckoning – but we have lower inflation numbers coming next week. It’s temporary – as I’ve been saying – but markets too often see what’s in front of them in the “now”, not the longer form picture. And – on one metric at least, as long as the money supply is controlled well in the coming months, our pandemic inflation is washed through (sticky bits aside). I (perversely) feel more comfortable about the inflation level (sure, I still think 3%-3.5% is a much more realistic target than 2% at the moment, and I still feel that the Government is delighted with that with all these frozen tax thresholds) than I have done for years.


The starter is out of the way, and this week I want to get stuck into the Resolution Foundation’s recently released report which is talking primarily about rents. This is the future of the sector, as we see it – because our price increases as people who use leverage have NOT been 22%. We have faced insurance rises of – you tell me – but I’d say well over 50%, and perhaps over 75% (I don’t have my group insurance data to hand). Maintenance rises of well over 40%, a lot of damage done by properties not being heated adequately during the cost of living crisis and also heavy rainfall over this winter season. Interest rate cost rises of more like 80-90%, on interest only mortgages – depending on where you measure from. If you measured from the end of 2019, 3% with a 1% fee would be fair I think – moving to 5.75% with a 1% fee right now (if we priced based on today’s bond markets). That’s 91.7%


So – rents up 25% is great for landlords (although nothing in real terms), but it STILL represents squeezed margins compared to before the pandemic. And we weren’t at the golden era of buy-to-let – let’s face it – George Osborne ended that. The Foundation captures that quite nicely in their analysis. There’s a relatively dry but worthwhile recording of their findings including Zoopla and NRLA input – that’s here on YouTube: 


Then, there’s also the fact that existing rents won’t be at market level. With 12 month gaps between rises, and in a portfolio situation, that’s impossible. This is again something the Foundation also alludes to in their analysis, and of course we are coming from two different angles – me as a portfolio holder and talking to everyone here from an investor perspective, and them as a think tank and social commentator. I do believe, however, that everyone wants tenants to be in affordable, decent housing and so whilst those rises (and plenty more) are absolutely needed to move back to anything like a functioning rental sector), there are most certainly more rises to come when you see it framed like that.


The headline from their report – entitled “through the roof” – are rents up 13% in the next 3 years as they see it. They characterise the current housing market as “not delivering for low-to-middle income families”. 


Let’s get into the summary:


The price of a new tenancy has increased by nearly 20% since the start of 2022. I always feel two ways about this sort of opening salvo. This is, after all, a report about rents – so, that has to be the focus. However – should it be out of context? How much are wages up since Jan 2022? (13%, average weekly earnings increase, to March 2024). How about benefits? (21.1%, but there have been 3 rises since then if we use the date of the report, this week, as the benchmark). How about housing benefit/LHA specifically? (average 17%). The actual number is 20% rather than “nearly a fifth” as well, which tells you where the author wants to take us on this journey.


In that context, it is concerning that wages haven’t kept pace with that (and that’s the Foundation’s general raison d’etre, working low-income and middle-income families) so they are rightly concerned, BUT we also need to focus of course on ALL tenancies rather than new tenancies. I’m also tempted to make the case to throw out the Scottish figures, because of the mess of rent control, but they may well already not even be in the data anyway – that level of transparency is not available.


Anyway – rental prices for all rents are currently rising at their fastest pace on record (that’s certainly consistent with the ONS data – last number, 9%). The report is keen to dispel the “myth” that the rent increases have been forced by mortgage increases – because 38% (their number? We’ve seen higher) of landlords have no mortgage. They cite the power of the market as the reason this should be dismissed. I struggle with this argument on an economic basis – which is strange when they come from an economic place (usually) in the debates I’ve seen.


It’s also quite incomplete as a piece of analysis when you compare the reality of an example I shared this week. Some of the numbers are somewhat hard to come by but even if we stick to ONS figures: 34.8% increase in insurance (overall, not property insurance, which I’d suggest is up even more) since Jan 2022. Maintenance and repairs – up 17.1% in the same time period. Mortgages – since Jan 2022 – not measured on investment property but I would suggest around 90% up as per my analysis above. Further costs will have been injected in some areas with new licensing schemes that pop up with regularity of course.


I know of no other business where (significant) increases in the cost of delivery don’t push prices up. Particularly when that service or good being provided is relatively inelastic (as all the research on the price elasticity of demand for housing suggests that it is). For those who don’t speak economist, that means that when the price goes up 1%, the demand for the good or service goes down less than 1%. I’ve honestly no idea why housing is treated “differently” and can only assume that it is an ideological position, which is a word that really shouldn’t contain the word “logical”, let’s face it.


The report then moves on to another incomplete piece of analysis, claiming that the decrease of 47,000 units in the PRS since 2019 as per recent Bank of England research (which is incomplete, but recognises that this sort of thing simply isn’t measured very well). Context required here: 1.68 million net migrants in that time, who I believe it is not really disputed are 90% likely to enter the rental property market – perhaps not all PRS, sure. Let’s be conservative and suggest only 1 million will rent, and we know the average immigrant household is 1.25 people strong – many gravitate to HMO as many readers will already know, but the number of available HMO units is ALSO falling according to the thin data that is around. There’s a need for a growing sector, not a shrinking or flat one. There’s also no allowances made here for properties that have been let as short-let accommodation rather than being sold off.


They also debunk the housing supply and demand argument, and, whilst relying on figures from 2022 which miss out the huge migration figures since then, I am more inclined to agree with that – supply is a continual problem that has got worse, but not relatively so much worse that it would explain the rise in rents.


To not even consider overall inflation as a significant driver here is madness, and strikes me as quite incomplete. My (admittedly relatively simplistic) argument that EVERYTHING is up 22% since before the pandemic fits Occam’s razor perfectly here. The answer is already in front of you. Getting tied up in the political side of it – or addressing the points that no-one else wants to for sensitivity reasons, or whatever – is (to me anyway) the obvious omission.


They prefer to focus on earnings (which, again, is their raison d’etre). There’s no discussion of the correlation between earnings and rents – and whilst it is self-evident that affordability is a critical factor, it would still be good to understand that correlation. The more interesting (but again, omitted) point by the foundation is that they display on the graph I’ve included for this week a falling trend in terms of rents, but don’t challenge why that is, and indeed why that should be. I have been referring to this since uncovering the data back to 2005 last year, and the foundation seems to have some data back to 2000. SHOULD rent be falling over time as a proportion of earnings? It’s great if it does (for the people as a whole), but if you damage the sector with hostility and taxation as has been the case since 2015, what would the expectation be? Surely, to drive people out, and reverse that trend?


There’s no reasoning explored for the direction of the trend line – and that leaves a lot of questions unanswered.  


However – in the interests of moving forward and finding some common ground, because all I am doing at the moment is finding fault even though the research definitely has some positive merits – let’s press on. Regardless of questions around the trend line – rents were 5 per cent or so below that trend line at the start of 2022. So, the move has been above the line since then of course. The argument that part of the movement is a “correction” is a sensible one, even if I disagree with the premise of a linear relationship downwards since about 2016.


So we are now at 5% below trend line, plus 18%, in the face of 13% wage increases. Smack on the trend line, then. The report also recognises the folly of looking at new tenancy prices (affecting around 22% of tenants) and, although I would again dispute the exact logic used, one cannot deny a lag effect on existing tenancies where rents will most likely continue to rise – for the reasons I have stated in terms of cost of delivery, mostly. Even the 38% (or more) of unencumbered landlords will have seen larger-than-inflation increases in their other costs above where existing rents have got to in the time period, and are still catching up.


They borrow the US results (which is something I have sympathy with) where rents are now increasing more for existing tenancies than they are for new tenancies. They don’t need to – the Zoopla or Homelet data as recently analysed here is moving more slowly (7.6% averaging the two) than the ONS figure (9%). Strip out the new tenancies and that gives you an existing tenant rise of 9.4% over the past 12 months. They predict 4.2% rent growth over the next 3 years on average – I’m above this, because I’m above the inflation predictions in the market still – although I’m no longer as far ahead of the pack as I was in 2022 and 2023. I’m just in the top 10% of the forecast now, it seems, rather than above the entire bar graph!


The report recognises how difficult it is to measure private rents. Since they are now so important (politically), much more effort is being made by the ONS and the Bank of England, and we’ve discussed before so I will leave that point there. 


The report also makes one of the worst parallels between rent and homeowners that I have seen. It quotes 33.8% of renters income on housing costs versus 10 per cent by the average mortgagor. It excludes the capital repayment element – which is not optional for homeowners. It always excludes the alternative returns that could be achieved by investing the deposit elsewhere. It excludes insurance, maintenance (let alone improvements), compliance costs, and the likes which you become responsible for as a homeowner.

It also leaves out the average renter’s household income (c. 30k) versus the average owned household’s income (c. 60k). Inconvenient, but surely worthy of a mention.


The data is also extremely outdated (ending 2021) when, since then, mortgagors have taken gigantic cost increases (or are facing them when they come to renewal). 


The biggest concern for me is that the net flow of properties into, and out of, the private rental sector as per this week’s graph is just so obviously wrong. There is no way the sector is changing by such a small amount, or has changed by such a small amount, in the past 11 years or so. I share it because it is the best data we have available, and the methodology is “not bad” and “better than the rest” but still very weak. It needs a complete overhaul – and this piece of work is one bridge too far for me on my own, I fear! 


I dislike throwing stones without a solution – but I hope the report gives you an idea of what the “sympathetic left” are saying about the housing situation right now, and also challenges a few of the assumptions which have limited logical bases within the report.


Congratulations as always for getting to the end – don’t forget the Property Business Workshop on Wednesday 24th April – the last ticket for you, or anyone you know who might want it, here: . Onwards, upwards, as we press on through Q2 – Keep Calm and Carry On!