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Britain’s obsession with house prices may have been suppressed during lockdown, but has been fully unleashed after liberated buyers and sellers embarked on a property market “mini-boom”. 

The latest indicator came from the Office for National Statistics, which this week said house prices jumped 3.4 per cent in the year to June, up from a 1.1 per cent rise over the year to May, when restrictions on the sector began to be relaxed. 

The ONS added a strong caveat, however: June’s big rise could be explained by “pent-up demand” built up during lockdown. We will have to wait until October to hear how this played out in July — including the effect of the stamp duty holiday on prices. 

For those who want to know how strong demand for housing is today, house price indices are an imperfect guide. 

When demand falls, prices do not follow in lockstep, since most sellers simply sit on their hands rather than offer their property to the market at a discount. Even some distressed sellers can be granted a stay of execution when mortgage lenders choose forbearance over repossession. 

As a result, a downturn in sentiment is far more likely to be expressed initially as a drop in transaction activity, rather than prices. 

There exists, though, another barometer of demand for housing, with arguably a more direct connection to changing economic circumstances: the lettings market. And while rising house prices have grabbed all the attention in recent weeks, residential rents tell a different story. 

According to the latest research from property website Zoopla, house prices in London are rising — but rents have dropped in the past 12 months. Its rental index for the capital shows a fall of 2.7 per cent in the year to the end of July, a decline that is likely to grow to 5 per cent by the end of the year, according to the company — with bigger falls in inner London.

Line chart of Zoopla Residential Rental Index, data to July 31 2020 showing London rental prices dive

Richard Donnell, Zoopla director, says: “If offices don’t fill up and we don’t start seeing tourism and international travel return then that’s going to weigh heavily on the London rented housing market. In London there is a close correlation between rental growth, and migration and jobs growth.”

As for the rest of the UK, Mr Donnell says other cities are experiencing a flattening of growth in rents, with Edinburgh particularly under pressure as rules have been introduced to curb the proliferation of short-stay properties aimed at tourists. 

At first glance, tourism should not affect the rents charged in the conventional market for long lets. But as travel ground to a near halt in the pandemic, landlords of Airbnb-style short-term rental properties have switched to offering longer residential leases, bringing significant supply to the mainstream market and thereby putting downward pressure on rents. 

A similar problem has faced the roughly 450 short-let operators in London that take leases on residential properties and repackage them as corporate lets for business travellers — a market that has taken a dive under travel restrictions. “All of those businesses flooded their stock back to the mainstream market, because they’re paying rent on it,” said Sandra Jones, managing director of housing research company Dataloft.

Ms Jones’s data backs Zoopla’s picture of declining rents in the capital, with softening growth elsewhere. Besides the employment strains felt in sectors such as hospitality and retail, another factor behind the trend is the muted annual intake of graduates. Companies have delayed recruitment because of uncertainty and the problem of bringing in new graduates without a significant staff presence in the office. The seasonal influx of international students at higher education institutions is also down on its usual levels. 

The relevance of rental data goes beyond an academic interest in the scale of demand. At the end of this week, the evictions ban that came into force at the beginning of lockdown will lapse. Groups representing tenants are worried about the prospect of a surge in homelessness among those unable to pay their rent. 

London mayor Sadiq Khan responded by asking to be given the power to freeze rents in the capital for two years. Research by the Greater London Authority and YouGov estimated that 180,000 London tenants — one in 12 — had fallen behind on rent since lockdown.

There will be some landlords who respond to the present crisis by trying to whack up rents. But asking for the power to halt rent rises in the capital at a time when data suggest they are on the decline looks like a mistimed policy. What is more, a rent freeze will do little to tackle the arrears problem — which has left tenants with debts of hundreds or thousands of pounds hanging over them.

Separate surveys — which include the views of tenants — have found the majority of landlords to be sympathetic over rent shortfalls during the pandemic. In a sector where cash flow is a high priority and voids strike at the heart of the business model, most landlords will want a paying tenant to stay, even where they may now be unable to stump up the full rent or have racked up arrears over lockdown. 

With uncertain times ahead — including rising unemployment, pressures on earnings, stock market volatility, a resurgent virus and the disruption of Brexit — only the most optimistic landlord will be confident of a plentiful supply of prospective renters to fill a vacancy. And as long as economic trends continue to feed directly into rent levels, tenants in the capital can expect a note of relief, at least, on their strained finances. 

James Pickford is deputy editor of FT Money. Email: james.pickford@ft.com; Twitter: @MrJamesPickford

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