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Rents rise as house prices fall

2008-05-20 06:13:44

By Brian Milligan

Business reporter, BBC News

It is a golden summer evening in a leafy suburb of North London. Vishaal Shah

is standing on his first floor balcony, looking out at a row of horse chestnut

trees in full bloom, and the sun sinking behind them.

"It's a wonderful view. We get the setting sun in the evening, and the rising

sun in the morning on the other side," he says proudly.

But the financial outlook for this 24-year-old is nothing like as pleasing.

Vishaal is about to see his rent go up for the second time in a year. He will

shortly find himself paying 50% more than he did a year ago. Then he paid 400

for a bedroom in a shared flat, and within a month or two it will be 600.

FORECASTS FOR 2008/9

House prices: down 20%

Rents: Up 10-11%

Source: Capital Economics

"It's a big, big jump," he says, "especially since salaries haven't gone up as

much. It's going to be a really tight squeeze; touch and go, basically."

Vishaal is far from alone. There are just over seven million households that

rent their properties in the UK, and many are facing big rent increases, if

they haven't had them already.

Capital Economics, a London-based consultancy, believes that rents will rise by

between 10% and 11% over the next two years.

At the same time, Capital Economics believes house prices will fall by 20% in

the same time period. So how can it be that the cost of renting is going up,

when the cost of buying a house is going down?

Landlords' money-spinner

Landlord EuGin Song knows the industry at first hand. He owns 20 properties in

the London area, valued at more than 4m.

In one of them, at the top of a huge mansion block in Hammersmith, he confesses

that he is among those who have been increasing rents.

"Last year, I was charging 700 for a two-bedroom flat in West London. Now I

get up to 800."

Rents and prices are cyclical. When property prices go up, rents come down.

When prices go down, rents go up

EuGin Song

Landlord

The reason, he says, is increased demand. People are reluctant to buy houses

while prices are falling, and many are deciding to rent until the market

improves.

"As a result, more and more people are coming into the market for rentals. Some

people are even selling to rent."

In some areas of the South East, there is particularly strong demand.

With new jobs at Heathrow's Terminal 5, as well as at the 2012 Olympics site,

there is particular pressure to find a place to live.

Shrinking supply

Then there is the question of supply. With the buy-to-let market cooling off,

investors are no longer so keen to buy flats to rent out. So the number of

rented properties available is not expanding as it was. All of which adds up to

a rise in the cost of renting.

And as EuGin Song points out, this should not be a surprise. When house prices

fell at the start of the 1990s, the same thing happened.

"Historically, rents and prices are inversely cyclical," he says. "When

property prices go up, rents come down. When prices go down, rents go up."

There are exceptions to all this. Where there has been an oversupply of new

flats, such as in the centre of Leeds, the cost of renting is actually falling.

David Pank, of local estate agents Manning Stanton, says smart properties that

would have cost 1,000 a month two years ago, now cost 800 at most.

But outside that niche market, people are queuing up to rent and they are

having to pay more.

"The demand we're experiencing is incredible. We are overwhelmed. And supply is

not keeping up with demand."

Mr Pank says rents in Leeds have gone up by 5% in the last six months alone.

On the other hand, if the counter-cyclical model is true, there will eventually

be good news. Anyone standing on their balcony and looking into the far

distance will eventually see house prices recovering and rents starting to

fall.