Why Rents Are Falling In London

Housing in London has become expensive over time because there are many restrictions on real estate development. London is not unique in this respect. This has happened in other global cities like New York and Paris, and this is truer of Indian cities like Delhi and Mumbai, too. Housing in London is expensive, partly because authorities are bent on preserving historical buildings, and partly because authorities do not allow real estate developers to build tall buildings. Harvard economist Edward Glaeser once said that the British seem to have exported their antipathy to height to Indian cities. London, however, has better housing standards because it is a prosperous city. London is also not a land-scarce city, like Mumbai. Demand for housing in London has not faced setbacks, despite the terrorist attacks in 2005 as housing in prosperous cities seem to be resilient to such setbacks given the benefits of living there far outweigh the costs.

Housing rents in London, however, fell in July 2016 by 0.5 per cent when compared with rents in July 2015. This may seem to be a modest decline, but this is the first time rents in London have fallen, in the past six years. This is not because the demand for rental housing has fallen. In fact, from July 2015 to July 2016, the number of people searching for rental housing rose by 10 per cent. The reason is that supply of rental housing has vastly outpaced demand. In  the same period, the number of housing in the rental housing market rose 23 per cent in Britain. It is surprising that the number of houses in the rental housing market rose by nearly a quarter of the existing rental housing stock in a year. This is a relief for tenants in London. High rents are a major barrier to innovation because the most creative people are not always the people who are able to pay high rents.

More people are renting out their houses because stamp duty rose to three per cent of the purchase price in April. When stamp duty hike was announced, there was a rush to buy property. People bought houses they otherwise would not have bought. The sales in March were 64 per cent higher than the average sales in the previous six months. Many were buying to let out their property. They also found easier bargains. Some experts expect the price of luxury flats in London to fall because supply has been rising. There is also greater uncertainty in the housing markets. So, many homeowners are keen on renting out property than on selling it.

India has much to learn from this because stamp duties in India are exceptionally high by global standards. This prevents many potential transactions from taking place. If a three-per-cent stamp duty can wreck the housing market in London, imagine the harm stamp duty might inflict on Indian cities. Stamp duty in most parts of India is many times higher. Not long ago, in most parts of India, stamp duty was higher than 10 per cent. Still, this has not led to a higher supply of buildings in the rental housing market. Why? The restrictions imposed on rental housing markets are even more stringent. Stamp duty is restrictive, but rent control regulations are even more restricting. So, despite the high stamp duty, people would still rather sell their houses than rent them out. The risk of renting out houses is so high because it is difficult to evict tenants. It is also difficult to raise rents if a house is under rent control because rents were frozen in India for so many decades. Inflation has also been very high for long, making it difficult and expensive for landlords to renegotiate contracts with tenants. Tenants, for example, see a hike in rents in a positive light, even when prices of all other goods are rising.

In London, however, rents have fallen even in properties which are already let out. Landlords in some parts of the city have proven to be quite willing to lower rents because of the excess supply in the rental housing market. In India, rents have not fallen because the supply of rental housing has consistently declined in almost all Indian cities since independence. The situation will change only with major reforms.