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Rent Increases Set to Create Buyers

 

With the market for selling houses currently experiencing difficulties, some would-be sellers are turning to renting out their properties instead. The latest letting survey by the Royal Institute of Chartered Surveyors (RICS) suggests that more homes are being made available for rent as sales stagnate and values drop. This may well be a smart move as Hometrack, a property data website, have suggested that the average cost of renting has risen 6.15% in a year. According to RICS, the key areas for rental growth include the South East and the South West, but not London, which was cited as the weakest area for rental growth.

 

A study of the Hometrack data, which looks at two bedroom properties in 21 cities, suggests that in one year prices have jumped by 17% in Oxford, 16% in Birmingham, 14% in London and 10% in Cambridge. According to these figures, rent inflation in these areas beat even those recorded for fuel and food. However, notice the discretion in the figures between Hometrack and RICS, who stated that of all the areas looked at, London’s rental yield had grown the least. This might suggest a certain lack of reliability with the Hometrack data, as RICS have a huge network of data sources to work with and therefore should be more reliable.

 

RICS spokesperson James Scott-Lee stated: “The sales market’s loss is the letting’s market’s gain. Some would-be sellers are retreating from selling and letting or re-letting their properties as they wait for mortgage lenders to offer buyers more favourable lending criteria.” Indeed landlords are reaping the benefit of an increased demand for both family homes and flats as potential buyers find themselves unable to meet new stricter lending criteria to get onto the property market. According to RICS the number of landlords exiting the letting sector has decreased. The number selling their properties when tenant leases expire has fallen from 4.6% to 4.2% in the first quarter of this year.

 

The question is, how long can these rental yields be sustained? If they continue to rise at present rates it is highly likely that a healthy proportion of would-be tenants will decide that renting is not financially viable and decide to take the alternative route of home ownership. Let us take Guildford as an example, a London commuter hotspot, where rents have risen 9% in one year. The cost of renting a two-bedroom house in the town would be typically around £270 per week. Compare this to an 85% mortgage on the same property, which would be around only £20 more, assuming an interest rate of 6%.

 

Anyone who is tempted to step into the lettings market to take advantage of these rising rents should tread with caution, paying particular attention when choosing an area. The closer the cost of renting to that of buying, the less likely the venture will be a profitable one. For example, in Milton Keynes, where rents are basically the same price as mortgage payments, rental returns have dropped 4% in a year. Data from Hometrack would suggest that a better bet may be Oxford or Cambridge. Even though these areas have seen double digit growth of rental yield in a short space of time, the cost of renting is only around 70% of that of buying.