Tenants have been paying down rent arrears despite a new record for monthly rents in October, according to the latest Buy-to-Let Index from lettings agent networks, Your Move and Reeds Rains.
Residential rents across England and Wales now average £770 per month, or £12 more than October last year.
Annual rent rises were 1.5% in the 12 months to October 2014. This follows faster average rent rises of 1.9% in the previous 12 months ending October 2013, and rental growth of as much as 3.4% over the preceding year.
On a monthly basis, rents in October 2014 rose 0.3%, or just £2 compared to the previous month of September 2014.
Slower rent rises have coincided with healthier tenant finances, with rent arrears approaching all-time lows. (See below)
David Newnes, director of estate agents Reeds Rains and Your Move, said: “Rents have edged to a new record and the rental market is pulsing with new demand. Yet at the same time, tenants are getting on top of their finances – helped by a cooling pace of such rent rises.
“Better affordability is good for tenants in the longer run too – and for landlords who can rely on steady revenue to pay the bills. That helps to support a virtuous cycle of only gradual rent rises. Alongside slower overall inflation, a material boost to the supply of properties available to let has helped keep rents from rising as quickly as in previous years.”
Tenant finances improved in October, with just 6.9% of all rent in arrears, down from 7.2% in September and 7.1% in October last year. Rent arrears are also just 0.3 percentage points above the record low 6.6% set in November 2013.
In absolute terms this represents £244 million in late rent in October, down from £256 million in the previous month – or a drop of £12 million since September.
Levels of the most severe tenant arrears have also improved. Households facing rental arrears of more than two months now represent just 1.4% of all tenancies, compared to 1.6% in Q3 2013, according to the latest quarterly Tenant Arrears Tracker from Your Move and Reeds Rains.
Newnes said: “Tenants have battled a broadly stagnant jobs market for years. Recent progress on the unemployment rate has helped bring down the most serious cases of rent arrears. But for others consistently falling just a little behind on the rent, the trouble is more with incomes that just haven’t kept pace with the cost of living.
“Instead of wage growth, a growing supply of homes to let and much slower rent rises have been far more useful in tackling the proportion of households falling behind. Looking ahead, if more homes to rent can coincide with a true renewal of real wages, this could prove a powerful combination – and would take rent arrears even lower.”
Rents in nine out of 10 regions of England & Wales are higher than a year ago. Leading all other regions, the East of England has seen rents rise by 4.9% in the last 12 months, followed by annual rises of 3.6% in the neighbouring East Midlands, and 3.1% in the North West.
By contrast, London rents have grown the slowest, up just 0.5% compared to October 2013, while annual rent rises were 0.7% in the South West. However these regions have both seen more buoyant rises than the North East, with rents 0.5% lower than 12 months ago and the only region to see an annual fall.
A majority of regions have also seen higher rents on a monthly basis. However, rents in four regions were lower in October than September, in contrast to the previous month which saw no regional monthly falls.
London and the North West both experienced month-on-month falls of 0.3%, followed by the North East where rents in October were 0.2% lower than September, and Yorkshire & the Humber with a 0.1% monthly drop.
The gross yield on a typical rental property in England and Wales now stands at 5.1% as of October, the same as in September 2014, but representing a fall of 0.3 percentage points from this point last year, when yields in October 2013 stood at 5.4%.
Taking into account price growth and void periods between tenants (but before costs such as mortgage repayments or maintenance) total annual returns on an average rental property now stand at 13.3%, over the 12 months to October. This represents a return to the same level as was reached in August 2014 – or the joint-highest on record.
By comparison, total annual returns were considerably lower over the preceding 12 months, at 8.2% in the year to October 2013.
In absolute terms this means the average landlord in England and Wales has seen a return, before deductions such as mortgage payments and maintenance, of £22,434 in the last 12 months. This is made up of rental income of £8,404 and an average capital gain of £14,030.
The lettings gets said that 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 11.2% over the next year, equivalent to £20,520 per property.
Newnes added: “Landlords have benefitted from a spurt of rapid house price growth. But as price rises steady a little, landlords can rely on newly stable rental yields. Gross yields on a typical property dipped over the last six months as purchase prices grew faster than rents, and now yields have steadied again, just above the long-run average of 5%.
“Stable yields aren’t the only good news for landlords. Letting a property now involves even less risk of not getting the rent on time, and tenant arrears could reach a new record low in the coming months. That should boost demand from tenants and investment from landlords. Good news on the affordability of renting is good news for the whole industry.”
