is this good or bad for house prices

You know where this is going. If landlords take up the slack in housing demand from would-be first-time buyers, does this not mean house prices will be pushed upwards over the next few years? Well, it might, but here is one reason why we think this is unlikely.

According to LSL, the cost of renting has risen by 3.1 per cent over the last year, and across the country your average buy-to-let landlord can expect to make £15,592 a year per property, or 9.2 per cent. Not bad when official interest rates are just 0.5 per cent. So this begs the question, if the return on buy-to-let is so high when all around interest rates are so low, does this not suggest we are set to see a surge in demand from landlords?

One potential fly in the ointment is that around 10 per cent of rent remains unpaid. So many landlords fear bad debts.

Another more serious fly is that the LSL figures on returns include growth in capital. Well, as we all know, house prices saw a big jump last year, and of course buy-to-let landlords would have done well out of this. But relying on capital growth from property is dangerous. The days when belief alone is enough to create momentum for house prices must surely be over.

But if rent alone makes buy-to let investing profitable, will this not push house prices upwards?

The big problem with this argument lies with the myth that there is a shortage of accommodation in the UK.

According to data from the Survey of English Housing published in 2008, no less than 47 per cent of existing owner-occupier dwellings – that’s 6.8 million homes – are under-occupied, meaning just over half of owner-occupied homes have more than one spare bedroom. And yet, just 18 per cent of private rented properties are under-occupied. It seems the main explanation for this high number of surplus space in homes is that home owners see their property as an investment. So if their home is bigger than they need, well, they see this as good, because it means they can benefit from rising house prices.

It seems that if we do indeed see a rise in renting, the new generation of households will demand smaller homes and we may see a surge in the number of larger properties converted into flats. All of a sudden, we may find there are enough homes to go around after all.

Investment and Business News is a succinct, erudite and informative roundup of today’s top news stories on business and the economy.

Useful articles