The Guardian reports that London rents have fallen year on year for the first time in 6 years. See the article here. What does this mean in real terms? If you negotiated a tenancy today, you would agree to pay less rent than you would have if you negotiated a tenancy a year ago.
Why is this happening? Truth is nobody really knows but as always, rent is a supply and demand game so either there is less demand or there is more supply or the demand is the same and the supply is more, etc, etc.
Let’s look at what has happened since February last year (the benchmark date used in article).
- Increase in stamp duty in April last year meant lot of people bought houses then to tried to rent them out (read: supply increased).
- Brexit happened. People are thinking twice about moving to the UK and to London. Young renters are consolidating and sharing one home to save money. Practically: imagine 4 people renting a house each. That means 4 houses have been taken out of the housing supply. Now, those renters have decided to move in together to save money. This means that only 1 house is rented and the other 3 go back into the housing supply. These 3 houses are now sitting vacant. Supply exceeds demand and to attract the 4 people back into renting a house each, the rents have to come down.
What is interesting in London though is that a lot of houses and flats are owned by huge landowners who simply don’t care if their properties are vacant. They will rather leave a property vacant than agree to lower rent (regardless of whether this is the market rate). I know, I have experienced this. It is different (but only slightly) when you are dealing with a private landlord who has only one property and who cannot afford to have it vacant. They are more likely to be sensitive to market realities. Big landlords are not. So good luck renegotiating your annual lease if your landlord is one of the big ones!
Some other advice: if you are renegotiating, make sure you have another flat/house that you can move into if negotiations go badly. The reason is that your landlord knows it is a difficult and expensive process to move so he will most likely use that to try and force an upward rent review regardless of what the market is saying. If you have a cheaper flat/house you can move to (cheap enough to justify the complex and expensive process that is moving) then you actually have some power. If you don’t, get ready to sign for a rent increase even in a falling rent market.
So basically when it comes to renegotiation time, you should really approach a separate letting agent, look at what they have and start negotiations. Get it to the point where you are about to sign. This should be about the same time you are about to sign your renewal. Now play hardball with your current landlord. Explain the market realities, point out the problems with the current flat etc, etc. If he is not amenable (basically, he wants to screw you) then delay, delay and delay until you are almost at the end of the lease period. Now tell him you are moving out unless he agrees to market rate. If he says no, you sign for the other flat and move. He won’t be able to fill the flat for at least a month so will lose a month’s rent. As he realises you are not bluffing, he may well come round (win for you). If he doesn’t you are in your new flat for cheaper. All good. The one caveat is to check the contract to make sure the landlord cannot retain your deposit in these circumstances.
See the Bloomberg article here
A couple of interesting stats: house prices in London are up 86% since 2009. The usual rule of thumb for London is that prices double every 10 years so that seems on track and nothing to be alarmed about.
Well, except for Brexit… The doubling of house prices every 10 years in London is a measure that to some degree depends on the UK being part of the EU. Would we have seen double digit growth every 10 years had the UK never joined the EU? Maybe but if you look at the state of the UK economically before joining the EU there must be some doubt. Whether this will hold going forward with the UK out of the EU (it might) we don’t know. The smart money says no. To double every ten years you need roughly 7.5% growth year on year. Assuming we see house prices in London growing at 4% post-Brexit then the numbers look interesting. A £1million house in London will grow to £1.48million if growth is 4% year on year. At 7.5% growth year on year, the number would have been just over £2million. This means everyone with a house around £1million is facing a £580 000 loss over the next 10 years or roughly £58 000 per year. Even if you halve the value of the house to £500 000 you are still talking about a Brexit cost of £250 000 over 10 years or roughly £25 000 per year. Like it or not, this could be the new reality.
See my previous articles: Brexit has not yet happened so the real upside or downside is yet to be determined.
Re the article though: price reductions in asking prices seems right and is in line with selling price drops we have seen since the referendum. Nothing new here. Essentially the story is: nobody knows what is going to happen when Brexit occurs. As such, sellers are getting nervous and trying to get out of the market, investors are no longer investing and we are sitting with a stamp duty second home punitive tax system that was set up assuming a remain vote in the referendum. As the vote went the other way, the government will have to rethink stamp duty and the tax treatment of second homes/buy-to-let as both are no longer fit for purpose.
Evening Standard thinks so. I disagree. The ES article is here.
Essentially their argument is that because the referendum result signalled that Brexit would happen decimated the pound, London is now and awesomely cheap place to live and work in. Er… if you are paid in US dollars that is. The average Londoner is not paid in US dollars but in sterling. The threat of Brexit has caused a rise in inflation and uncertainty about jobs. For the average Londoner, London is more expensive to live and work in and Brexit has not even happened. This is a point worth clarifying: A decision that sometime in the future we might leave the EU is not Brexit. Actually leaving the EU is Brexit. You can’t look around and conclude that Brexit has happened and that the economy has not been destroyed – because Brexit is still to happen! That would be like observing someone who has decided to drive his car off a cliff but has not actually done it and concluding that driving off a cliff is not that bad as if it is, how come the car is intact? Er… that’s because it has not happened yet. Let’s wait until the decision is carried out before we decide what is good or bad.
Catchy headline for Evening Standard but dead wrong. It’s the kind of #fakenews that we see everywhere. The important thing is to answer the question: why would they print such a #fakenews headline? I will let you do that for yourself.
So to conclude: London is not cheaper to live and work in for the average Londoner after the referendum.