Why property prices rise and rents remain the same

publication date: May 19, 2014
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

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Property prices grow whilst the price for renting a house stays the same

I was on BBC Breakfast on Friday chatting about the rental market on Friday in response to the new LSL rental update which collates data from agents Reeds Rains and Your Move.

The latest headlines for the rental market from the indices are:-

LSL from Reeds Rains and Your Move

  • Annual rent rises fall to just 0.6%
  • Rent rises total 12.9% since January 2010
  • Tenant finances improve in April, as late rent drops by £18 million

The latest data shows that rents are rising at “less than half the latest rate of CPI inflation (1.6%)” and in fact aren’t keeping up with inflation as rents have risen by 12.9% while inflation is up 14.5% since 2010.

Belvoir Lettings Index 
This index has been going since March 2008 and supports the LSL results, but goes further because in 2009, prior to LSL’s report coming out there was a ‘crash’ of rents in 2008 in some areas like Nottingham by 20%.

So overtime their data shows rents haven’t kept up with inflation at all. Their offices which have been trading since 2008 show the average monthly rent is £685 per month. Back in 2008 when we started the index, it was just over £690 per month, suggesting that rents are hardly any different to the level charged six years ago!

Office of National Statistics
And the independent private rental report from ONS backs both of these rental indices data sources.

Their Q1 data shows:-

  • Rents grew by 1% in the 12 months to March 2014 for Great Britain and England
  • London grew the most by 1.4%
  • Wales grew by 0.6% and Scotland by 1.3%

Why are rents not rising when property prices are going up?
The first thing to understand is there are two rental markets. The first is measuring rents for new tenants renting ‘today’, the second is measuring rents for tenants who are already in the property and may have been for some time.

There are normally two times when rents are moved up (or down) when renting:-

  1. When a property is advertised for rent

  2. When a tenancy is renewed

What’s happened since the credit crunch is rents until September 2008 went up as property prices went down and there wasn’t enough stock on the market, then in October of the same year, rents fell dramatically as people who couldn’t sell let instead, flooding the market with houses in particular. Even London rents by around 5% at this time whereas in other areas (eg Nottingham) they fell up to 20%.

Since that time, more tenants are staying in properties for longer (nearly two years now) and more tenants are coming onto the market who would have traditionally bought.

And, if comments from landlords are anything to go by, because mortgage rates have been so low since the credit crunch, many landlords, who know their tenants are having a tough time financially, have kept rents the same if they have stayed – or haven’t put up rents when letting again for fear of not attracting a tenant quickly.

Rents can only go up in line with wages 
Unlike property prices where sellers want the highest price and renters want the lowest, landlords with an empty property want a tenant in quickly, so have to price it according to what the tenant can afford. So if wages don’t go up – neither can the landlord charge more rent. This is especially the case when things like utility bills have gone up so much, meaning tenants have very little ‘spare’ to pay for rent increases.

Landlords with tenants in a property don’t want the risk of losing a good tenant who pays rent on time, in full and keeps the property in good condition, so rather than raise rents and risk replacing a good tenant with a bad one, they’d rather keep the tenant in. It also saves several hundreds or thousands of pounds in terms of admin fees for credit referencing, updating the property, carrying out inventories and updating the legal contract, plus tenancy deposit scheme costs.

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