Today: How the Spending Review will affect the Property Market

PropVestment: Spending Review

Today, Wednesday 20th October at lunch time will announce his plans for the Comprehensive Spending Review setting out the Government’s spending plan for the next four years. It has been widely accepted that the worst hit is going to be public sector workers, with estimates of up to half a million job cuts on the cards. The other major factor that will affect Property Investors is the speculated 20% cut in housing benefit spending and other welfare spending cuts.

The most effected areas will therefore be where there are a high proportion of either public sector workers or high concentration of residents on housing benefits or other benefits.

London will be the least effected and most resilient region as expected; having only 4% of the workforce in the public sector, however there may be areas with high concentrations where there are council estates etc. These small packets of property will see prices suffer as rental yields fall and lack of demand from affluent tenants, these kinds of phenomenon will be short lived as do investors should buy as prices fall over the next few years. Prices will bounce back, London has scarce land and there is always demand, as people move away and then a mix of students, foreign workers and professionals move in. This has been seen all over council estates in the inner city areas especially in zone 1 and the boundaries with zone 2. Of course in the short run it will be difficult and investor will need cash that is stalemate for a while, but there will be bargains and great long term gains for those who have the patience and capability to wait and sit tight.

Some of the worst hit areas may be stereotypically middle class areas such as Oxford, Cambridge, Canterbury where over 40% of the work force is public sector and property prices have already dropped 3-9% over the past three years. This supports the prediction that properties associated with public sector workers will be hit hardest, due to unaffordability and potential job losses.

Update from Upad.co.uk

Benefit cuts mean families with less money.
The bulk of the spending cuts will be coming from the welfare budget and we’re talking total cuts of £18bn a year by 2014 with an overall decrease of £81bn. This includes previously announced cuts in Housing Benefit and Local Housing Allowance as well as significant cuts to other benefits and tax credits. That’s going to mean a good deal less money sloshing around amongst people on lower incomes. Unless you are only renting high-end properties, and that’s generally quite unusual, then it’s likely that the people you are letting to will have less ready cash. That could spell trouble on rent levels and also with arrears.

Unemployment hurts everyone
The Chancellor’s “best guess” regarding job losses is that these changes will add nearly half a million unemployed to the dole queue, predominantly amongst public sector workers. These job losses are already filtering through with many quango employees already receiving redundancy notices. Job losses, and even fear of unemployment, make people more fearful of making changes. It’s easy to argue that’s good for landlords as many people will stick to renting or move back to it until the dust settles. But in any case uncertainty in the employment market is bad news.

Cuts will slow down Councils and Courts even more
We’ve looked at the economy in general. But start thinking about how these cuts might affect how you run your affairs as a landlord. Do you ever have any dealings with your local authority? If you let HMOs, you certainly will and there are plenty of situations that see a landlord interacting with their local Town Hall. Councils are notoriously slow in dealing with paperwork and decisions already. The CSR cuts the grants to local authorities and requires greater efficiency and job cuts. I can’t see how that’s going to improve the service landlords get from their local council.

One other government department that has promised to find savings is the Ministry of Justice that administers the courts system. Whether we’re talking squatters, rent arrears or anti-social tenants, getting legal action takes a long time already. Landlord Action recently noted that getting the relevant Court Orders can take as long as six months. We agree with them when they say that’s too long. Action needs to be taken in weeks not months. But it seems that these Ministry of Justice cuts will extend rather reduce the time that landlords have to wait for proper legal protection for their properties. That’s going to cost landlords a lot of money.

Do you let a student house?
Thinking more laterally, we can see that even less obvious changes in today’s announcement will likely have an impact. The Higher Education budget will be slashed by 40% and the recommendations of the Browne Report implemented for university funding and tuition fees. The doom-mongers are saying that these moves will see a drop in student numbers. Any such decrease will doubtless have an impact on landlords renting to students in university towns and cities.

There may be trouble ahead.
Whilst we can see the logic in some of the Comprehensive Spending Review cuts, we certainly take no pleasure in them. Such is the magnitude of George Osbourne’s plan, that they must be considered carefully. We don’t have the full picture yet and the devil is always in the detail. So whether you think they are right or wrong, every landlord must agree that they’ll have a significant impact on the residential lettings market all over the country. And we believe that for many landlords the impact will not be good news.

 

More updates to come as new develops

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