Measuring liquidity in the UK rental market and the impact of COVID-19
It is well known that the property market follows predictable seasonal patterns each year: it picks up in the summer and winds down in the winter.
A more liquid UK property market is observed in summer, where both prices and number of transactions increase (Ngai and Tenreyro, 2014). This provides important insights on the timing of buying a property. In this guest blog, Dr Okan Yilmaz, Professor Oleksandr Talavera and Dr Joy Jia explore if there is “seasonality” in the UK rental market and whether the distance from properties to universities affects this.
In England, the private rental market accounts for nearly 20% of households and around 4.6 million people live in privately rented properties (English Housing Survey, 2018-19). With a good proportion of the UK population currently living in private rented accommodation, understanding the impact of seasonal patterns on the market is beneficial for tenants, landlords, agents and policy makers. To provide this insight we examine changes in rental markets across time and locations within cities. In particular, we explore how the probability of being rented responds to seasonal patterns and whether distance to universities plays any role.
To answer these questions, the analysis focuses on 13 major cities: Birmingham, Leeds, Glasgow, Bristol, Liverpool, Manchester, Sheffield, Edinburgh, Cardiff, Coventry, Newcastle, Nottingham, and Plymouth (2015-2017 period). Using Zoopla.com and UBDC data, changes in hedonic rental prices and liquidity (high volume of activity in the market) over time are calculated. Liquidity can vary depending on the location of houses within cities so, focusing on the effect of student housing demand, we also explore how liquidity differs for houses that are close and far from university campuses.
Figure 1. Entry and exit ratios
Panel A: Entry Ratio
Panel B: Exit Ratio
Figure 1 presents the dynamics of the rental market through the calendar year. The entry(exit) ratio is calculated as the number of new listings entering (listings exiting) in the market between the beginning of a month and the end of a month divided by the numbers of all available listings in the respective month. Each grey shaded line represents each city included in the sample. The dark solid line represents the ratio for the whole sample.
The figures show that rental markets are more liquid in late summer and early autumn. We also document that the rental market in Edinburgh seems the most liquid with an average of 70% entry ratio, followed by Glasgow and Bristol. These three cities also appear to have the highest exit to available ratios.
In terms of changes in liquidity over time, the rental market seems to be similar to the sale market as it heats up during summer and cools down in winter and this also coincides with student demand. Figure 2 shows how time on the market and rental prices change with relative distance to university campuses.
Panel A reports the average length of marketing time of the listings that come to the market in the relevant month. The dashed black line represents the listings which are within 3 km distance to a university campus. The solid grey line represents the listings 3 km further away from a university campus.
We observe that liquidity on the rental market for houses further than 3 km from a university is constant and is approximately 2 months, which is our full sample average. However, the results are completely different for houses in the within 3 km sample. Notably, we document much greater variation: the peaks are observed around October and November, which coincides with the start of the academic term. Furthermore, houses that enter the rental market after the start of the academic term stay on the market around one month longer than the sample average.
Figure 2. Liquidity and Prices
Panel A: Time on market (TOM)
Panel B: Rent
To calculate the price index, we employ the hedonic price approach and calculate rental price changes for houses within 3 km (blue) and outside 3 km (grey) separately. Price changes within a 3 km sample show significant variation. However, we do not observe a clear pattern for rent changes across the calendar year.
Understanding the fluctuations in rental markets in major UK cities will be vital for examining the impact of COVID-19 on real estate transactions and labour mobility. The significant effect of the start of the academic term on the rental market is an indicator of the large demand for student housing. However, this situation is likely to change in Autumn 2020, when most UK universities are likely to have either online-only or blended (online and face-to-face) teaching. It is likely that we will observe the effects of the COVID-19 pandemic on the UK rental market for some time to come.