How economic performance affects landlords
By Will Leyland, 05 October 2017
Landlords are always aware of yields, capital appreciation and rental increases, but are they always aware of other economic factors that can affect the industry they operate within?
Here we’ll take a look at other economic indicators that can reveal which way things are heading in the housing market.
The jobs market
The jobs market is of crucial importance when thinking about the affordability of rents in the private rental sector (PRS). In simplistic terms, if there aren’t enough jobs and they aren’t paying enough then many renters aren’t going to be able to afford to rent your property and certainly won’t be able to survive rental increases, hitting your yields over time.
When looking at investing into an area it’s key to consider short and long term trends when it comes to the local job market. Let’s take Leeds as an example, which employs a large percentage of its workforce in the financial and tech sectors.
If you’re buying in the urban city centre then highly paying sectors like finance and tech will work well if you’re looking to attract young professionals, but perhaps not for more family orientated properties.
Most of the up-and-coming areas around the country that are increasing markedly in price tend to be areas with large scale infrastructure spending.
Take Crossrail as an example, where areas such as Reading are predicted to increase in price by as much as double all thanks to their proximity to rail within comfortable distance to London.
Similarly areas like Manchester, Leeds, and other northern areas are looking towards the beginning of the HS2 high speed rail line being constructed. The project is likely to decrease travel times between the regions and the capital by as much as half, and this really is key when considering the marketability of your property to maximise yields and rental increases.
The ability to travel easily on rail, tram and quality roads can’t be underestimated.
Something that has been making the news regularly recently has been the influx of foreign investment into city centres and wider regional areas. With the weakness of the pound in comparison to currencies such as Yen, the Euro and the Dollar, investors are making hay whilst the economic sun is shining by placing their money into UK property.
Be careful not to look at areas that are likely to be flooded by foreign investment, such as the South East (excluding London), as market saturation could well set in. There is a nice balance in cities like Leeds and Manchester where domestic and foreign investment is fairly balanced.
Wages decreasing or increasing can be crucial to the rents you can demand from your property. It seems like a simple point but one that is often missed.
In certain areas there are issues with job creation, which creates an oversupply of skills for certain employment areas. This in turn means that wage growth is slow and at a lower rate as there is little incentive for employers to pay higher wages with so many vying for so few jobs.
Similarly to the previous point, there is always a good balance in cities that see the best growth. We’ll go back to the likes of Manchester, Blackpool, Leeds and London to show that when there is a good supply of skilled labour with a good supply of well-paying jobs then we can see a healthy increase in wages, driven by innovation and a balanced supply of labour.
Very simply, if wages are stagnant in an area then don’t expect to be able to increase rents too much.
Something which you will have no control over, but which can be key, is the rate of inflation across the country.
Currently we’re seeing inflation sit around the 2% mark, which isn’t too bad. Issues occur when wages don’t follow suit and the cost of clothing, food and other essentials increase too quickly. With Brexit negotiations in full swing, it’s not surprising to see food and materials increase in price but the crucial point will be whether incomes follow suit.
This is helping the healthy UK property market, and we should expect to see the Bank of England increase interest rates in the next 12 months, but only slightly. This shows a good sign of confidence from the central bank, and landlords should be encouraged at their backing of the wider economy.
All in all, economic performance can give us a good and detailed picture of certain areas, just not where we might always expect.
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