May 27

Rent rises drop to less than half inflation

Rent rises across England and Wales have slowed to less than half the current rate of inflation, according to the latest Buy-to-Let Index from LSL Property Services plc.

David Newnes, director of estate agents Reeds Rains and Your Move, part of LSL Property Services, comments:“Proposed reforms to the private rented sector are clearly well-intentioned, but will not help the rental market. For a number of reasons, tenants would be worse off if all the proposed changes were imposed.”

As of April, rents across England and Wales are now just 0.6% higher than twelve months ago. This is less than half the latest 1.6% annual rate of inflation as measured by the consumer prices index (CPI).

In absolute terms the average rent in England and Wales has risen by only £5 in the last twelve months, currently standing at £741 per month compared to £736 in April 2013.

Rents in April are now at levels 12.9% higher than in January 2010. This is less than CPI inflation over the same period, which amounts to a total of 14.5%.

Rents have risen below inflation in the majority of individual months since January 2010.

Over the 52 month period since the start of 2010 there were 33 months where inflation was higher than rent rises. Rents rose more quickly than inflation in only the remaining 19 individual months.

April 2014 is the eleventh consecutive month where rent rises have been less than inflation.

The latest rent rises are also significantly below the long term mean. Since the start of 2010 this has averaged 2.8%, or more than four times the 0.6% increase seen in the twelve months to April 2014.

David Newnes continues, “Private renting is not in any form of crisis. Not only are rents rising more slowly than inflation, but the cost of private renting is also rising in line with household incomes. Even before the economic weather changed so recently, the last few years have seen rent rises dwarfed by inflation most of the time. Meanwhile the private rented sector has absorbed millions of households while other tenures have been unable to take up the slack.

“Poorly thought-through proposals could throw a spanner in the works. Firstly, rents would be higher. When tenant fees were banned in Scotland rents rose 4% in the space of six months. This is ten times the rate of rent rises in England and Wales over the same six month period, where such a ban had not been introduced. Before this they were mostly flat.

“Secondly, the equal treatment of potential tenants would also suffer. If tenant fees are banned and the landlord and letting agent have to bear the cost, there is every possibility letting agents and landlords will start pre-vetting tenants. Furthermore, if tenants have no advance financial commitment then there is nothing to stop them pursuing multiple tenancies at the same time and just taking the first one that completes, dropping the others.

“Finally, it should be remembered how not all landlords are ‘fat-cat investors’. Many only have one property used as their pension. Others are ‘accidental landlords’ and rely on the rent to pay their mortgage. If tenants drop out at the last moment, this could mean hardship. Missed mortgage payments would lead to possible repossession. New landlords would be wary of entering the market or extending portfolios. Many would exit – and again that would be bad for tenants.

“Far more effective would be if politicians focused more on encouraging the supply of new homes. Parliament should be debating how to help increase investment in the private rented sector even further”

Rents in six out of ten regions are higher than a year ago. The fastest annual increase is in the South West with rents up 4.3% since April 2013. This is followed by a 3.2% annual rise for the East Midlands and a 2.4% increase in the North West compared to twelve months ago.

London, Wales and the South East have all also seen rents rise, though more slowly. Rents are up by just 0.6% in all these regions since April 2013.

Out of the four regions where rents are now lower than twelve months ago, the North East has seen the greatest fall – down by 3.0%. This is followed by a 2.8% annual drop in the East of England, a 2.0% fall in the West Midlands. Rents in Yorkshire and the Humber are 0.7% lower than twelve months ago.

On a monthly basis four out of ten regions have seen rents fall. Between March and April the South West has seen rents drop 0.7%. This was followed by a 0.4% dip in London rents, while rents in both the North East and East of England have fallen by 0.1% since March this year.

By contrast Wales has seen the fastest monthly rent rise of 1.1%, followed by a 0.9% monthly increase in both Yorkshire & the Humber and in the West Midlands.

David Newnes continues: “Improved mortgage lending is helping landlords to expand their portfolios in many areas of the country. And while every corner of England and Wales has its own local market, the overall trend is clear. Landlords are prospering – and tenants are feeling a parallel benefit.”

Gross yields on a typical rental property have held steady at 5.1% in April, the same as in March 2014. Due to higher property values, this is slightly lower than in April 2013, when the average gross yield on a rental property in England and Wales stood at 5.4%.

However, taking into account price growth alongside void periods between tenants, total annual returns on the average rental property are considerably higher. Total annual returns are now 10.3% in the twelve months to April, up from 5.8% in the twelve months to April 2013.

In absolute terms this means the average landlord in England and Wales has seen a return of £16,887 in the last twelve months, with rental income of £8,057 and capital gain of £8,830.

If rental property prices continue to rise at the same pace as over the last three months, the average buy-to-let investor in England and Wales could expect to make a total annual return of 7.8% over the next 12 months, equivalent to £13,600 per property

David Newnes comments: “A reinvigorated purchase market and a growing economy are providing a significant boost to property values. But equally, the first real flicker of life from wages means landlords can now rely on a renewed affordability of renting. Rental income is becoming safer for landlords as tenants start to feel more secure with their own finances.”

The financial situation of tenants has significantly improved compared to the same point last year. The total amount of late rent across England and Wales stands at £251 million as of April 2014, down from £282 million in April 2013. Tenant arrears now represent 7.4% of all rent compared to 8.4% a year ago.

Tenant finances are also healthier when measured on a month-on-month basis. The proportion of late rate is down from 7.8% in March to the current level of 7.4%. In absolute terms this represents £18 million in late rent that has been paid off in the space of one month.

David Newnes concludes: “The British economy is still on the mend, and some tenants are still finding things tough. Even with accelerating economic growth, wages are still seriously behind where they were ten years ago after the effects of inflation are taken into account.

“Yet things are getting better, and this is apparent in the rental market. The cost of living challenge will be with us for some time. Yet it will be overcome by supporting the industries that supply vital services and by conquering the real culprit – stagnant wages.”