Subletting & UK Property Market

To what extent is subletting properties damaging to the UK property market?

Ilyaas Mirza

Subletting is a process by which an individual rents a property with the intention of renting it out to others. This process is an effective way for entrepreneurs to make money quickly, with minimal risk compared to its reward. Not only does it suffice the entrepreneur’s profit motives, but it also guarantees landlords their rent. However, with the rise of subletting, how does this affect the common person? And more importantly, what does it mean for the property market?

Subletting: the process

This section is important for understanding the impact of subletting. This is a utopian scenario, many would struggle to find enough tenants to make it profitable enough to run.

Subletting is a relatively straightforward process. Say that John is an investor and wants to make passive income, but he lacks the capital needed to break into the property market. A £150,000 apartment requires at least a £7,500 deposit, and the costs go on to include a huge number of associated costs, risks and bank approvals etc. Moreover, it could take John years to finally break even and make real profit (not potential gain by the value increase of the property, but actual liquid wealth). So instead, John invests his money in the same property, except this time he chooses the subletting path. Instead of purchasing, he rents the same apartment for only £800. Of course, in some cases he would need to pay security deposits and at least 3 month’s rent. Even so, his initial starting costs are significantly lower than purchasing. Then, John lists the property on rental platforms for short stays and lists the property at £60/night. He can justify charging this higher nightly charge, as short stays typically demand more money, as would be the case when you rent an Air BnB (when compared to a similar property over an extended period). Even if John only has the property rented out for 20 nights, he is still making £1,200 a month, which nets him £400 profit (before cleaning costs etc). This gives John a 50% return on investment, which is very high. The landlord is also satisfied, as they are also being paid their rent, and so bear no risk with whether or not there are tenants in the unit. The sub-renters/final tenants are also satisfied as they are able to live flexibly at relatively low costs and can pay over time. Overall, it is a flexible, low cost and high reward system, but it depends on the demand for short term rentals in the area; this is a different matter, however.

The problem

The problems are plentiful.

Firstly, it increases effective demand. Even though no new households are created, subletting adds more people competing for limited rooms. For example, London has a huge sublet/room-rental market.This means even if whole flats aren’t affordable, people still enter the market by subletting a room. This keeps general rents higher than they would be if only full-unit demand existed.

Secondly, it masks the true affordability crisis. Subletting acts like a “pressure release valve”. Young people or newcomers can live in expensive cities by renting rooms instead of whole flats. But this also means high rents for whole properties persist, because people accept alternative arrangements. This makes it look like the market can sustain high prices, even though many tenants can only afford a portion of a property.

Thirdly, short term subletting raises prices. Air BnB style subletting has a stronger effect. It removes properties from the long-term rental market, and raises local rents in high tourism areas, like London, Edinburgh etc. This means that there is overall reduced supply of available housing, increased local rents and can push councils towards stricter rules.

Is it really that bad?

It can be argued that it has minimal impact on National prices. Even in London, subletting is a relatively small share of total tenancies. Owner-occupiers, buy-to-let investors, and institutional landlords set most prices. Therefore, subletting is not large enough to meaningfully change UK-wide rents or house prices, and its effects are localised and often overstated.

Moreover, it can be seen as beneficial to the property market, as it reduces the ‘artificial’ demand for new builds. When tenants sublet rooms in existing houses, for example, more people are accommodated without new housing being constructed. This reduces pressure on developers to build quickly, reducing financial and environmental costs. It also reduces the land scarcity premium. Overall, Subletting increases the effective stock of housing, slowing price growth driven by scarcity.

Furthermore, it prevents overinvestment in HMOs and buy-to-let. Without subletting, investors would see higher yields in HMOs. This means more investors would buy family homes and convert them to Homes of multiple occupancies, reducing supply for owner-occupiers, in turn pushing up prices. With subletting tenants themselves can split rooms reducing the incentive for investors to absorb more supply.

Judgement

In conclusion, subletting is not damaging to the UK property market, as it is small scale, and due to the insignificant negotiating power of subletters who accept whatever rent a landlord demands. It can also be insignificant in its impacts as it isn’t as lucrative as one might think, as it heavily depends on consumer demand. It also has beneficial factors which help the market to adjust and not oversupply due to artificial demand. Overall, it can be viewed as a ‘fad’ that looks far more lucrative than it really is, and is no where near damaging as people think. Subletting in family areas is damaging, however.

Personally, I think that subletting is not damaging. Most ‘entrepreneurs’ who sublet make more profit selling courses about subletting than actually doing it, and it is not an effective and sustainable practice.