South East: Supply of homes to rent continues to fall

The South East is seeing a continued reduction of new property coming on to the lettings market, according to the July 2018 RICS UK Residential Market Survey which revealed that 19% more respondents saw a fall rather than a rise in new landlord instructions last month. This is the third consecutive quarter that the supply of homes for rent has fallen in the region.

This pattern reflects the shift in the buy-to-let market in the wake of tax changes which are still in the process of being implemented, as smaller scale landlords exit the sector. Significantly, the drop in instructions is evident in virtually all parts of the country to a greater or lesser extent.

At a national level, rents are projected to increase over the next 12 months, but the shortfall in supply over the medium term is expected to force a cumulative rise of around +15% (based on three-month average of responses) by the middle of 2023, and the South West is viewed as likely to see the sharpest growth over the period.

Turning to the sales market, house prices in the South East did not pick-up during the month of July, with 16% more respondents reporting a fall rather than a rise in house prices, whilst the average number of homes on agents’ books in the region rose to 40 (up from 39 the previous month). This is an improvement on the same time last year (July 2017) too, when agents had an average of 31 homes on their books.

Despite the speculation built ahead of the August Bank of England meeting, 6% more respondents reported a rise in new buyer enquiries. However, sales failed to pick up during the month of July.

The June survey signalled some doubts as to whether the pipeline of new supply would continue to improve in the light of the feedback on appraisals being conducted by valuers. This was upheld as the appraisal balance in July was once again firmly negative. As a result, our judgement is that the average inventory on the books of estate agents is likely to remain close to historic lows. This impact of this is visible in both the 12-month sales and price expectations net balances.

Simon Rubinsohn, RICS chief economist, commented: “The impact of recent and ongoing tax changes is clearly having a material impact on the Buy to Let sector as intended. The risk, as we have highlighted previously, is that a reduced pipeline of supply will gradually feed through into higher rents in the absence of either a significant uplift in the Build to Rent programme or government funded social housing. At the present time, there is little evidence that either is likely to make up the shortfall. This augers ill for those many households for whom owner occupation is either out of reach financially or just not a suitable tenure.”

Abdul Choudry, RICS policy manager, added: “Our survey suggests that recent Government policy and legislation changes have impeded the growth of the Private Rented Sector (PRS), which is a vital part of a functioning homes market. Withdrawing tax breaks that small landlords relied on, placing an extra 3% on second home Stamp Duty, and failing to stimulate the corporate build to rent market, has understandably impacted supply.

“While the current focus is rightly on using regulation to improve the experience for tenants, Government must urgently look again at the PRS as a whole, including ways to encourage good landlords. Ultimately, Government must consider the impact of its policies, and if the wish is to move away from PRS, it must provide a suitable alternative.  If they wish to improve PRS, as we have suggested by professionalising through regulation and the PRS code, there is justification to reconsider the tax structures.”