The latest Buy-to-Let Index from Your Move and Reeds Rains has found that average cost of renting a residential property in England and Wales has accelerated, to rise more quickly in June than in any month previously on record.
Rents across England and Wales reached a new record high at £789 in June, standing 1.4% higher than the £778 recorded in May and up 5.6% on an annual basis since June 2014.
This is despite consumer price inflation falling to 0.0% in June, and underscores a new trend since the beginning of 2015 by which rents have risen out of line with the rate of inflation.
This is also the first month since July 2013 where rents are rising more quickly than house prices for comparable properties, with this annual rate of house price growth standing at 4.5% over the twelve months ending June 2015.
Adrian Gill, director of estate agents Reeds Rains and Your Move, said: “The pedal is pressed to the metal in the rental market. Not only have rents hit a new all-time record high – but we have never seen them rise so quickly.
“Growing wage packets and a strengthening economy mean that a greater number of tenants are able to afford higher rents. With such an overall shortage of housing in the UK, rental costs are primarily driven by the amount tenants are capable of paying. Rents have also decoupled from inflation. While record low inflation fueled by falling oil prices might bring clothes or food within the range of tenants’ purchasing power, it doesn’t have much of an effect on the property market in the short term.
“There may be new factors on the horizon too. In the wake of the Summer Budget’s reduced assistance for landlords, we might see many aim to pass additional costs onto their tenants. If so, rents would receive yet another acceleration.
“In all this, we mustn’t lose sight of the driving force behind rent increases – the mismatch of supply and demand. Expanding our housing stock needs to become a national priority. If anything, competition for homes is only going to get more intense over time. The fierceness of housing competition needs to be met with an equal dedication to homebuilding.”
Annual rent rises in the East have accelerated at a record pace to a new record high, increasing 13.8% over the 12 months to June 2015 to stand at £839. This is the 15th consecutive month of accelerating rent rises seen in the region and goes alongside rapid growth in purchase prices in the East.
London showed the next strongest year-on-year growth in rents, with a 9.6% increase since June 2014, pulling rents in the capital up to an average of £1,241, a new record high. In third place but some distance behind, rental costs increased 2.2% year-on-year in the South East to stand at £778 in June.
Due to a mild slowdown, rents in the South East are still short of record levels. By contrast Yorkshire & the Humber is the third region to have witnessed a new record high in June, with an average monthly rent of £550.
On a monthly basis, London led the way with a 2.8% increase just between May and June, closely followed by the East with 2.4% month-on-month growth and the East Midlands at 1.5%. Over the same monthly period, rents fell in the South East (-0.2%) and the South West (-1.3%).
Gill said: “Annual rent rises in the East are nearly half as fast again as in the capital. It seems like we might have a new hotspot on our hands.
“At the heart of the Eastern region, strong property price growth and some of the best job prospects in the UK combine to make Cambridge fertile ground for rental growth. But one city alone can’t account for the record rate of growth experienced across the whole Eastern region. We also have to take into account the wealth of commuter areas for the capital based there. It may be that we’re seeing an unusually high number of Londoners making the move out to Essex and Hertfordshire, while keeping their London salaries, driving up demand for higher end rental property.
“However, aside from any particular hotspot one trend is clear – nine out of ten regions have seen faster annual growth last month than the month before. Across England and Wales rents are going one way for the time being.”
The gross yield on a typical rental property in England and Wales (before taking into account factors such as void periods) stayed steady in June at 5.1%, the same as the month before as well as June last year.
Total annual returns fell again in June, but only slightly. On average, landlords in England and Wales have seen returns of 9.2% over the year ending June 2015 – down slightly from 9.3% in May and 11.9% in the year ending June 2014.
This means that the average landlord in England and Wales has seen a return of £16,216 in absolute terms, before deductions such as mortgage payments and maintenance. Of this, the average capital gain contributed £7,946 while rental income made up £8,270 over the twelve months to June.
Gill added: “Resilient yields backed up by rapid rent rises are a boon for landlords in otherwise trying times. Though the Summer Budget threatens to eat into their profits, record rents should provide buy-to-let investors with some comfort: the fundamentals still make being a landlord an attractive proposal.
“The fact that rents have risen faster than house prices should reinforce that the primary source of a buy-to-let investor’s income is rent rather than capital gains – house price growth is a welcome bonus, but not the be-all and end-all of rental property investment. Meanwhile, with mortgage rates so low, there’s rarely been a better time to invest in new property.”
Tenant arrears made up 8.7% of all rent payable in June 2015, up from to 7.6% of all rent in May, and 7.8% in June 2014.
Gill said: “While any uptick in the proportion of rent in arrears is a step down the wrong path, this should be seen in context. The overriding trend is still towards lower proportions of rent in arrears – far lower than was seen during the financial crisis.
“A certain degree of variation is to be expected – tenants aren’t robots, and bad months happen. The important thing is to ensure that tenants are able to avoid these situations becoming more serious if arrears build up.
“In the long term, if we want more encouraging trends to continue, there needs to be a greater emphasis on what can be done to help tenants and landlords alike. It’s one thing to slap landlords with a tax and call it a done deal, and quite another to address the issue of housing in a consistent and sustainable way. The cornerstone of progress, as ever, is housebuilding.”