Now here is something odd. As you probably know, falling house prices mean that demand for rental properties is supposed to rise. This in turn is supposed to push up rent, encouraging buy-to-let landlords to re-enter the housing market, thereby pushing up house prices. This is the core argument put forward by property bulls.
If that is so, then explain this. According to Saturday’s FT, rents right across London are falling.
The pink’n’ quoted Tim Hyatt, head of lettings at Knight Frank as saying: “We have noticed a huge increase in stock in the last three to four months.”
The FT piece also quoted Knight Frank as saying rents in London were between 5 and 20 per cent lower than levels seen in the spring.
Yet, if you were to base your conclusions on the markets from the regular monthly reports put out by Paragon Mortgages, you could be forgiven for concluding the rental market is like a bed of roses.
Rental yields have risen to 6.4 per cent, says Paragon, the highest level since November 2006, and investment income for buy-to-let investors has risen by 11.7 per cent over the last year.
Paragon even has the average investment property rising in value over the last year and says that the average investment property generated an overall return of 13.6 per cent over the last 12 months, that’s adding rental income to property appreciation.
The best place in the UK to make a profit was the South-West which saw a total annual return of 26.1 per cent. Wales was the worst with a total annual return of 4.8 per cent.
Perhaps the most telling statistic from Paragon, though, was this one: “rents continue to rise in five out of ten regions.”
Now, it seems that if rents are rising in five out of ten regions, they are not rising in five out of ten regions either, suggesting the market is close to being flat.
When you think about it, a 6.4 per cent rental yield is not that special. After you deduct agent fees, the cost of periods when rental property is empty, maintenance costs, and of course the interest rates on the loan taken out to buy a property, it makes a fairly lacklustre return.
Is that a return sufficient to compensate for falling property values?
The argument that the credit crunch will push up rental yields overlooks a key point. Demand can only rise if people can afford to pay more.
Quite clearly, right now, people can’t.
True demand is a concept that is relative to price. As price rises, demand falls; it’s the most basic law of economics, and yet, the property bulls seem to overlook it.
Comments
Trackbacks