Can ex-rental property rebalance the UK housing market?

UK Housing Market Update: March 24, 2010

* We believe that a large pool of rented property will be put up for sale this year. While that might initially result in higher sales, we doubt that the mortgage market will allow demand to keep pace with this rise in supply, meaning that the level of unsold stocks is likely to rise this year.

* The latest RICS Lettings Survey showed a second successive fall in new lettings instructions in the final quarter of 2009. (See Chart 1.) That is consistent with anecdotal evidence of a rise in the number of landlords selling up. That evidence also suggests that the number of ex-rental properties coming on to the market has risen sharply in recent weeks. So how much ex-rental property might plausibly now come on to the market and how large a boost to the stock of property for sale might it provide?

* Between 2005 and 2007, it was typical for around 5% of rented property to be sold at the point that the tenancy expired. However, most landlords decided to sit out the subsequent housing market correction, a response that is consistent with the idea that many are discretionary sellers. As a result, the number of landlord sales dropped to almost zero in early 2009. (See Chart 2.) But with selling conditions now improving, there may be a backlog of landlords looking to trim their portfolios.

* According to CLG, there were around 2.64 million market-based private rental tenancies in the UK in 2007. Assuming a 12-month tenancy, that implies that in 2006 and 2007, on average, 11,000 ex-rental properties would have been put up for sale each month (2.64 million/12 x 5% = 11,000). Taking 2008 and 2009 together, we estimate that, over the past two years, landlord sales averaged around 6,000 a month, only just over half the 11,000 average of 2006 and 2007. In total, this implies a potential sales backlog of 145,000 properties.

* However, another potential source of supply is the huge number of accidental landlords created by the recession. Between 2007 and March 2009, data from the English Housing Survey suggest that, across the UK as a whole, the number of privately renting households and thus the stock of rented property rose by around 450,000. Roughly a third of that rise (145,000) will be explained by landlords holding on to property for longer. But even if another third can be explained by some landlords taking advantage of the drop in prices to expand their portfolios, that would leave a further 150,000 properties belonging to accidental landlords.

* Thus, in round terms, there could plausibly be 300,000 rental properties (150,000 discretionary sellers and 150,000 accidental landlords) whose owners might now be keen to sell. HMRC data shows that there were 850,000 completed sales in 2009. Even if only half of those rental properties came onto the market this year that would represent a 15% to 20% jump in the supply of property for sale.

* Of course, there is also almost certainly significant pent-up demand in the market. So in the first instance a higher supply may simply result in higher sales. But with mortgage credit still in short supply, we doubt that a 15% to 20% rise in supply could be fully absorbed with the result that the acute supply shortages which plagued the market last year may soon begin to ease.