Assetz® News - Housing Shortages Are Going To Get A Lot Worse, Pushing Rents Up Dramatically

Housing Shortages Are Going To Get A Lot Worse, Pushing Rents Up Dramatically

1st March 2008 |

The supply/demand imbalance in UK housing is simply not going away, and is showing very strong signs of worsening in the short to medium term, making prolonged house price falls a very unrealistic outcome and we strongly suspect that many will be surprised by a return to house prices growth later this year and indeed for the next two or three years at least - not a very popular house price forecast view at present.

To understand the scale of the housing shortage and how much worse it is getting every year one only needs to look at the most basic facts. We estimate that there is already a housing shortage of around 400-500,000 properties. The Joseph Rowntree organisation thinks this will grow to 1.1 million by 2022. We think it will get far worse than that, far quicker. The reason is once again driven by the credit crunch, as well as government and planning errors and mismanagement. There were 160,000 properties built in 2006 according to the best estimates. This is likely to be 150,000 in 2007. Unfortunately, the credit crunch has severely impacted on the property development sector in terms of available finance and indeed the bank's willingness to lend on property development for the time being.

We forecasted in the autumn of last year a dramatic slowdown in property development and hence new properties being built for the next two years at least due to reducing inevstor demand and reduced finance. At one point we thought there would be a 140,000 properties delivered in 2008 and 2009 but we are revising that figure downwards to 125,000 for each of these two years. This is in the face of government targets of 240,000 new properties a year and lobbyists trying to get this raised to 280,000 a year in order to begin to slowly catch up with the backlog. This isn't going to happen. The National house building Council shows private housing construction starts have plunged by 40% in January. If that carried on we would be down to about 90,000 new property is being started in 2008, a lot lower than my prediction and guaranteed to cause a very sharp increase again in the balance of demand over supply.

On top of that local planners are making life increasingly difficult for developers and it gets harder and harder every year to build anything. Developers can't get permission to build, can't easily get finance to build and the only result will be a significantly increasing shortfall of properties per year. I was speaking at a conference this week with Julian D'Arcy, Northern Chairman of Knight Frank, and he actually used the word shortage when describing his forecast for the availability of rental property in central Manchester in the not too distant future - the first time I've heard anybody in a traditional property consultancy agree with our view that the much discussed oversupply of city centre flats is an unsubstantiated urban myth. He also confirmed our forecast in the autumn that developers would slow down their building plans but in fact he made it sound worse than we thought suggesting that next to no developers were starting on site on new schemes in Manchester in the near future - a complete standstill near enough and sure to help in the very sudden swing from slight oversupply to moderate undersupply of property over the next year.

The reality appears to be far more mundane - developers have indeed built substantial numbers of city centre apartments and supplied these at a rate greater than people have adapted to the city centre living. What people have not appreciated is that city centre living is achieving critical mass with cities looking less like building sites and more like attractive places to live. Demand is catching up with supply and it is extremely likely that a squeeze on city centre rental property will take place between 12 and 24 months time causing rents to escalate dramatically. Bear in mind all regular reports on the UK residential letting market are already indicating a substantial rise in rents in the past 12 months, just read my recent blogs for all the references.

All in all, there is an extreme turn down in housing supply combined with firm demand, rocketing population (and in particular single households) and rocketing rental demand that will lead to landlords continued purchases - there can only be one outcome - house prices themselves will be very firm and it is extremely unlikely there will be a crash and rents will rise dramatically at a rate not seen for a very long time.

It's interesting to hear Alistair Stewart of Kleinwort Dresdner say that there will be a serious fall in new starts of city centre apartments by developers and yet at the same time he thinks this will then lead to a crash in prices. In my book of economics, reduction in supply in a market leads to firm or growing prices and Alistair's rather perverse thinking is the type of thought process that led the banks to think sub prime lending was a wonderful risk-free investment and lost them getting on for $400 billion. Investment banks should be keeping rather quiet at the moment having made some rather shocking mistakes in basic investment decisions and straying into the unknown field of property is making them look rather silly. Paying a little more attention to their core business may have prevented the credit crunch.

As usual I'm happy to stick my neck on the block and be held accountable for my projections - I've got a lot of property in Manchester, the biggest city outside London, the biggest university city in the whole of Europe other than London and the best infrastructure of any city outside London. Two bed flats rented four years ago for 800 to £850 with or without parking - this dropped to £650 to £750 for the last three years but is now starting to rise. We reckon two bed flat typical rentals will reach £775 to £825 with or without parking by January 2009 and are likely to continue upwards to £875 to £925 with without parking by the end of 2009 due to the severe exceeding of supply by demand during this period. Don't worry if you own property elsewhere in the country, I do too, and rents there are going to be rising substantially too.

If you're interpreting the data any differently to myself then I'd love to hear from you.

Stuart Law