Renting is as good a measure of economic confidence as buying

Published on Friday 23 October 2009 22:10

RECENT research has revealed that the average age of tenants occupying shared flats has risen in three years from 25 to 28. The reason is that existing leaseholders are staying in rented property longer.

This statistic has implications for the wider business community. Indeed, anyone looking for a fairly accurate measure of the pulse rate of the economy could do worse than study the residential rental market.

During the summer, a lower-than-average cost of new residential property leases suggested that, in Edinburgh and Glasgow at least, rental rates had fallen. In fact, the real reason was because the greater number of properties let to new tenants during June, July and August were at the smaller end of the market (that is, one-bedroom or compact two-bedroom flats).

More new lets this summer involved smaller properties because so many leases held on larger properties were being renewed, rather than given up, by their existing occupiers. This was a sure sign of one of the most salient repercussions of the mortgage famine – young singles and married couples unable to get on the first rung of the ladder of home-ownership.

Traditionally, for younger homeowners, a sizeable surplus on their first sale gave them sufficient equity to trade up to a larger property. And so it went on over succeeding years until their children matured, fled the nest and the couple downsized.

However, with house prices static, young people will be less encouraged to buy if they face the prospect of nil or negative equity several years from now.

By remaining in rented accommodation – a market that is overwhelmingly 'furnished' – fewer young people are buying new carpets, sofas, refrigerators and other household goods than had they gone on to owner-occupation in the normal scheme of things. Thus this financially enforced extension of property renting has negative repercussions for the high street and for retail parks.

Until the autumn of 2007, executive housing in areas like Edinburgh's West End and the Park area of Glasgow was much in demand from firms seeking accommodation for company directors posted to central Scotland from elsewhere in the UK or overseas.

Now this movement of people – one of the main symptoms of a buoyant economy, is just not there, or at least not to the extent it was two years ago. The corporate-led demand for this type of accommodation has to a great extent dried up and those companies which are still seeking this type of property on behalf of senior staff know they can drive a hard bargain on rents.

Therefore, the rental market is confirming something else that many of us suspected: that the downturn in executive postings is a sign of an economy still under-performing greatly.

The more optimistic economists are still predicting a turnaround in the fortunes of the economy early next year, while, at the other extreme, some believe that the level of public and private debt in Britain is such that it may take until 2015 to get back to where we were in mid 2007.

The national deficit is so deep that, whoever wins power, the business community will likely have to bite on the same bullet as everyone else.

So, by all means continue to keep an ear open for what economists have to say, but it may be appropriate also to keep an eye on the residential rental market – as a weathervane it might just be one of the best economic barometers around.

&#149 David Alexander is proprietor of the rental and estate agency firm, D J Alexander, based in Edinburgh and Glasgow.