As Available Rental Properties drop by 44%, Could Derby Tenants Face More Rent Increases?
Tenants in the Derby area face further rent hikes in 2023 as the number of available rental homes has dropped to an 18 year low. Many ‘accidental’ landlords have cashed in on the post lockdown property boom of the last two years and sold their properties to owner-occupiers, NOT fellow landlords. What does this mean moving forward?
Firstly, lets look at some headlines before we get into the detail...
• The number of properties available to rent in Derby has dropped from 2,042 to 1,152 since February 2020.
• The average rent a tenant has had to pay has risen from £627 to £924 since February 2020.
• Many local landlords have cashed in on the post-lockdown property boom of the last two years and sold their properties to owner-occupiers and NOT fellow landlords.
• The supply of rental property in and around Derby isn't near what is needed, which is of benefit to landlords rather than renters.
The Derby rental property shortage is currently very evident. In this article, we look at why there is such a significant lack of homes available for rent in the local area and what it means for buy-to-let investors.
Anybody who enjoys surfing the property portals (Rightmove, Zoopla and On The Market) will have observed an emerging trend that the number of properties available to rent in Derby has dropped considerably in the last couple of years.
This reduction has been seen all around the UK as well. For example, on 1st November 2020, there were 372,931 properties to rent on portals. By the 1st November 2021, that had dropped to 275,650; by the 1st November 2022, that had fallen to 171,224.
That doesn't mean the number of privately rented homes in the country has dropped by over half, it means that there are fewer properties coming onto the market to rent.
For tenants, especially over the last 12 months, it has become progressively more challenging to find a rental home, thus making the rent they must pay go up. This state of affairs in the property market isn’t showing an indication of getting any easier either, making for a hard time for all renters.
So, what is the reason behind the rental property shortage, and what does this mean for existing landlords or those potential investors considering buying a Derby buy-to-let property soon?
Several different components are making the perfect storm in the UK property market.
Firstly, the number of households in the UK.
The UK has not been building enough homes for the last 20 years. I appreciate that parts of our local area seem like one huge building site, yet as a country, we are woefully undersupplied with property to live in. This has meant house prices continue to rise due to demand.
The government have known about this issue for decades. The Barker Review of Housing Supply published in 2004 stated that the UK had experienced a long-term upward trend of 2.4% in real house prices since the mid-1970s because of a lack of house building. The report stated that 240,000 houses needed to be built each year to keep up with demand.
The average number of houses built since the mid-1970s has been around 165,000 per year, meaning the UK is short of 3,375,000 houses
(i.e. 45 years multiplied by 75,000 missing homes per year).
Several years ago, the government set a target to build 300,000 new homes each year to address this issue.
However, in 2019/20, the actual number of homes delivered stood at just 243,770. In 2020/21, the number of properties built dropped to only 216,000 new homes. In a nutshell, there are fewer available homes to buy, meaning fewer available homes to rent.
Secondly, tenants are staying in their rental homes longer.
A Derby first-time buyer's average house deposit is £37,171 - the UK average deposit is £53,935.
The average rent of a Derby property in November 2022 is £924 per calendar month - up from £627 per calendar month in February 2020 – quite a rise!
These numbers translate into renters not being able to pay the rent and be able to save for a deposit, or if they are saving, it is taking a lot longer to save for a deposit due to the cost-of-living crisis and higher rent costs.
Also, many tenants have decided to stay in their existing rental homes because of the rent rises. Many landlords are less inclined to raise the rent on an existing property when they have a decent tenant who keeps the property in good condition and pays rent on time. Anecdotal evidence also suggests that rent arrears in those properties are dropping as tenants know if they don’t pay the rent, the chances are they will have trouble finding another property, and if they do, they will have to pay a lot for their next rental home.
For local landlords, this is all positive news - tenants are staying for longer in their rental properties, arrears are lower, and void periods are less likely. When it comes to the market there is less competition, because of the decrease in the availability of rental properties, so this makes the investment an even better bet.
Thirdly, landlords are selling up on the back of recently increased house prices.
It would be difficult for buy-to-let landlords to ignore the rising property prices in recent years.
The average property value in Derby in the summer of 2022 was 10.7% higher than in the summer of 2021.
For some buy-to-let landlords, especially those who were classified as ‘accidental landlords’ (an accidental landlord is a landlord who never chose to become a landlord, it was just after the Credit Crunch of 2008/9, they found themselves unable to sell their property, so they temporarily let their own property out), they chose to ‘cash in’ on the higher house prices. This would have also contributed to the lack of available Derby homes for rent.
Yet everything isn’t all sweetness and light for landlords...
Landlords have a few costs to consider before investing in buy-to-let, including everything from regular refurbishment costs, buildings insurance, letting agents’ fees, income tax, and, not forgetting, stamp duty.
Talking of costs, one issue some landlords are facing is their failure to plan financially for the recent mortgage interest rate rises. Some landlords may have become complacent to the ultra-low Bank of England base rates we have had since 2008 and, therefore, may need to sell their rental property, which, if bought by a first-time buyer, will remove another property from the Private Rented Sector.
Another hurdle to jump is the proposed new regulations requiring better energy efficiency for rental properties. It is proposed all new tenancies must have at least a minimum of a 'C’ rating for their EPC (Energy Performance Certificate) from 2025 and 2028 for all existing tenancies.
Therefore, as a buy-to-let landlord, it is wise to do your research to make sure the buy-to-let opportunity is correct for your rental portfolio, particularly when it comes to weathering any impending financial storms.
Landlords need to consider the returns from their Derby buy-to-let investments.
Landlords can earn money from their buy-to-let investments in two ways. One is the property's capital growth, and the other is the rental return, or yield. In 96% of buy-to-let investments, there is an inverse relationship between capital growth and yield (i.e. properties that tend to go up in value quicker will have lower yields 96% of the time – and vice versa).
Getting the best balance of yield and capital growth depends on your current and future needs from your buy-to-let investment.
If you would like our team to review your portfolio and ascertain if your existing portfolio will match your current and future needs for the investment - whether you are a client or not, feel free to drop us a line, and we can have a no-obligation chat and possibly organise a review.
What does all this mean for the Derby rental market?
The continued shortage of rental properties means it will be more difficult than ever to find a property to rent, and so rents will continue to grow.
Unlike in Scotland, England and Wales do not have rent controls, with Westminster ruling out the possibility of introducing rent control here to deal with the cost-of-living crisis.
You would think rent controls would be a no-brainer, yet economists from around the world have proved for the last 75 years that rent controls might help tenants in the short term, yet ultimately it drives landlords to sell their investments in the long term, thus reducing the stock of available properties to rent out which is not great news for future tenants.
Therefore, it is highly likely that Derby rents will continue to rise for tenants.
Landlords who persevere with their buy-to-let properties or become a buy-to-let landlord are set to benefit because they have an asset in very high demand. The housing shortage, not to mention the other issues discussed above that are affecting the supply of rental properties, is unlikely to be fixed anytime soon!
In conclusion, the local Derby rental market is a constantly changing picture. What IS known is that the supply of rental properties is far from what is needed, which can only be to the benefit of buy-to-let investors rather than of tenants renting.
Buy-to-let is a long-term investment. Everyone reading this knows that the real value in your buy-to-let investment is playing the long game, allowing your buy-to-let investment to grow over time. Like the crypto or stock market, getting sucked in by get-rich-quick schemes that are selling 'apparent quick wins' in property investment is very easy.
Please get in touch - without any cost or obligation - if you are interested in making your first Derby buy-to-let investment or considering adding to your existing portfolio.