Rent levels rise again

Buy-to-let-investors are predicted to make good returns over the next 10 years or so as rents continue to rise and house prices are projected to increase steadily, according to two recent reports on the property market. Rents have increased by 4.3% over the last year and are likely to rise still further because of a "scarcity" of mortgage finance and a shortage of good quality properties, the Royal Institute of Chartered Surveyors (RICS) said.

In their residential lettings survey for the second quarter of 2012 they predict that rents will rise by 3.9% on average across the UK over the next 12 months. In the three months to July demand among tenants has continued to grow but the number of properties coming on to the market has little changed, the study found. The study also showed regional variations with the north-west of England seeing rents increase by the biggest margin, with a 6.9% rise.

"While tenant interest is still riding high, what remains to be seen is whether many are willing to meet the increasing rents being demanded by landlords” said RICS global residential director, Peter Bolton King. However, it is clear we have seen rents grow steadily right across the UK for some time. This is partly down to the problem of the scarcity of mortgage finance and the large deposits required by lenders. These barriers to homeownership need to be addressed alongside the shortage of new stock coming to the market."

Would-be buyers have remained trapped in the rental sector, unable to raise a deposit or meet lenders' toughening mortgage criteria. It is also a possibility that many people are choosing to rent because of uncertainty surrounding the housing market. The Council of Mortgage Lenders reported that buy-to-let lending increased by nearly a fifth over the last year amid strong growth in the rental sector, although volumes have remained at about a third of their 2007 peak.

Those investing in buy-to-let will make capital as well as rental returns in the long term, separate research by Pricewaterhouse Coopers  suggests. House price growth is projected to average 2% a year in real terms between 2012 and 2025, with a lack of available homes pushing up prices later in the decade once demand recovers from current subdued levels. This compares with average annual increases of about 4% a year between 1984 and 2007.

Despite the predicted lower growth, once rents are added, a landlord with a buy-to-let property could expect a decent return after running costs between 2012 and 2025, but buy to let investors should always bear in mind that property is a potentially risky asset.

Whilst the rise in rents is welcome news for landlords it has to be seen against the fact that public sector workers are subject to a two-year pay freeze, and the average pay rise in the private sector is three per cent, according to the pay experts Incomes Data Services.

Given that rents are rising faster than wages it is not surprising that the number of people falling behind with their rent is also rising. 9.2% of all rent was late or unpaid at the end of June, compared to 8.9% in May. In total, unpaid rent in June amounted to £289 million up 5% on the previous month. "For renters, this is yet another cloud in the gathering storm," says Campbell Robb, chief executive of Shelter. "Rising rents at a time when wages are flat lining means that many families are reaching crisis point, cutting back on food and other essentials just to make ends meet”.

The balance of supply and demand in the rental market is still skewed by the lack of available properties, which adds pressure for rent increases. Landlords should also value the priceless asset of a reliable tenant who pays a reasonable rent, always pays on time and looks after their property.

Parkinson Property

16th August 2012


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