It has long been recognised that housing is both an item of consumption and an asset. The difference may appear to be only of interest to an economist but it is critical in understanding why different European housing markets perform differently.
Occupiers who regard their dwelling as items of consumption will only pay as much for it as they are willing or able to afford. But as an investment, the price is determined purely by risk/return expectations, relative to other investments. If the occupier cannot afford it, others may invest.
In the UK, there has been a shift in residential tenure in recent years as the private rented sector has expanded. In 2011, tenancies increased by 25%. This has been driven by house prices peaking in the boom years and falling by only 7% since, but also by tighter financing conditions for owner occupiers and higher deposit requirements.
As a result, first-time buyers are even more excluded than they were before the recession. Families’ initial choice of tenure is proving critical; if they can meet the initial financing requirements of owning, real costs fall over the years and they can move further up the ladder. But failure to make that first step means costs do not fall in real terms, making a move to owner-occupation tougher.
In the past decade, buy-to-let landlords have dominated the market segment that was previously the preserve of the first-time buyer, becoming the ‘price-makers’, while owner-occupiers are the ‘price takers’. Despite expectations that buy-to-let investors would exit at the first sign of falling values, they still hold their assets and are investing more.
Since 2007, private sector landlords’ share of the residential pie has increased by 42% and they now account for a fifth of the total stock. Many of those who would traditionally fit the first-time buyer category have had no option but to rent – and to become ‘price takers’ in rents. According to IPD, housing rents have risen by over 11% since 2009.
This growth has made residential the best performing sector over three, five and 10-year periods and has started to raise interest among institutions, although they remain concerned about the low net yields and management issues.
Residential rents are unregulated in the UK, unlike other parts of Europe. The Netherlands and Switzerland, the European markets with the highest proportion of residential institutional investment, are highly regulated markets, with The Netherlands having minimum and maximum rent levels. In Switzerland, where half of AXA Real Estate’s managed assets are in residential, the system supports long-term tenures (typically seven years), providing substantial protection for tenants including restrictions on uplifts and evictions.
Rent controls may seem unattractive to investors, yet they provide substantial security of income, as incoming tenants must pay market rents and only then have the benefit of controls on rises.
In Switzerland, 60% of the population lease property and it has one of Europe’s lowest owner occupation rates. But in surveys, more than 80% of Swiss respondents say they would prefer to own, but cannot afford to do so. It is not hard to see why. House prices are high compared to incomes and affordability has fallen in the past year. The country is geographically constrained and mortgages require a minimum 20% deposit.
Switzerland also has one of Europe’s strongest population growth rates, which has supported demand for rented housing. Swiss institutions have become ‘price makers’ and typically have a 15% real estate allocation – almost treble that in the UK. With low return expectations of 4.5-5%.
Swiss residential investments are attractive In the UK, higher total return expectations have precluded involvement in the housing market. But the choking off of demand by owner-occupiers means that letting is becoming more respectable for the middle class, to the extent that institutions are looking at this sector again. Given appropriate returns, they could become the ‘key makers’ that uplift the UK residential market into the institutional playing field.