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Blip or bust: the end of the rental boom?

Robert Powell
by Lovemoney Staff Robert Powell on 16 April 2012  |  Comments 8 comments

As rents dip and some buy-to-let mortgage rates increase, Robert Powell asks if the good times are over for landlords.

 

A mixture of stress and desperation is palpable in the voices of most of people who call. It’s been barely twelve hours since I posted an online advert for my soon to be empty room in central London, and my phone has not stopped buzzing with texts, calls and emails from flat hunters.

This huge demand for my small abode in an ex-council block in the Hoxton area of London clashed somewhat with the property topic I had been researching all day. Rents are now down 1.6% on their October 2011 peak and have dipped in all but three of the four months to March. Alongside this, some buy-to-let mortgage lenders are now beginning to up rates.

These two facts have led some to surmise that the seemingly unshakable rental sector was beginning to wobble.

Soaring demand

The buy-to-let sector has boomed over the last few years thanks to soaring demand and competitive mortgage rates. The stagnant residential mortgage market has fuelled this boom. Put simply, there are currently just too many hurdles for first time buyers to clear in the race to purchase a property.

Even if home hunters can scrape together a deposit in the current tight financial climate, there’s still no guarantee of getting a mortgage. As a result, transaction levels have been sat at around half the level they were six to seven years ago.

This has left renting as the only viable solution for many. But this surge in demand for lettings – along with high levels of inflation – has caused rates to rapidly swell. This increase has been most pronounced in London, where the average rent is now a huge £1,028 – 5.6% higher than it was just 12 months ago.

Figures made available to lovemoney.com looking at regional demand for rented rooms confirm that London remains something of a bubble within the lettings market. The research, that uses average page views on the rental website Spareroom.co.uk, shows that the top seven areas for demand are located within the capital, followed by commuter towns such as Slough, Guildford and St. Albans. Predictably, these regions also have the highest rental rates. There are only three areas outside of south east England that make it into the top 15: Aberdeen, Cambridge and Oxford.

At the other end of the spectrum, room adverts in the Scottish towns of Galashiels and Dumfries get the fewest page views on average, followed by Swansea and Motherwell.

The Spareroom.co.uk stats also explain the huge demand for my room, as the region emerging top of the list – east central London – is also the location of my current flat. Room adverts in this area get viewed around 150 times every day. The most popular ad in the last month received a massive 677 clicks in the space of just 24 hours.

London bubble

So if demand is still high, what explains the recent dip in rents? Well, when it comes to housing, London should never be held as indicative of the wider national situation.

Matt Hutchinson, communications director at Spareroom.co.uk says London is definitely a bubble when it comes to housing with around half of the traffic on the site coming from the capital and south east England commuter region.

“There are always more people who need to live where the jobs are. There is plenty of affordable housing still around, but having affordable housing where there are jobs is the problem,” he says.

The Stamp Duty holiday has also played a part in the slight rent dip. The temporary tax break, which expired late last month, triggered an increase in first-time buyers. This in turn took more people out of the rental sector, easing demand and bringing down rents in February.

A blip, not a bust

The real impact of the Stamp Duty holiday on the lettings market will be revealed when April’s rent figures are released. But chances are – as the holiday is a one-off tax break – rates will rise again.

Ben Thompson, Managing Director of Legal & General Mortgage Club, sees the drop in rental rates as a temporary blip and says demand will probably stay strong for the rest of the year owing to a lack of confidence in employment and restrictions on mortgage finance.

As for recent increases in buy-to-let mortgage rates from major lenders such as Santander and Leeds Building Society, Mr Thompson cites the current Europe-wide crisis as a key reason.

“Funding has become much harder so mortgage rates have become more expensive relative to perhaps where they were nine months ago. What that forces me to do if I’m a landlord is to say ‘can pass it onto my tenant’, in terms of increased rent,” he says.

Rising property prices

So what does the future hold? Well, if new research from rightmove is to be believed, the situation in the residential sector is not getting any easier for first time buyers. The figures show that the average property asking price in England and Wales has now climbed to a record high of £243,737. This in turn pushes up the level of deposit needed to purchase, raising the homeowning hurdle even higher and diverting more people to the rental sector.

Predictably, London has seen the biggest increase with prices shooting up by 14.9% in the four years since the previous peak.

It seems for the capital’s population, renting – or indeed buying – a home, is set to stay stressful for a good time yet.

More on property and mortgages:

Property asking prices hit record high - in the south

The top 10 fixed rate mortgages

The hidden cost of buying a new build

New Government planning policy does not go far enough

Will borrowers with rented solar panels have trouble remortgaging?

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Comments (8)

  • meldrewreborn
    Love rating 44
    meldrewreborn said

    I'm astonished that changes to housing benefit and general benefit caps being inroduced now were not mentioned. If people, particularly in London, are forced to lower their sights on property because of benefit changes then it will surely impact on rental levels, and the change will be to move rents lower. QED?

    Report on 16 April 2012  |  Love thisLove  2 loves
  • Aquasponge
    Love rating 38
    Aquasponge said

    Is the offset of interest against tax coming to an end for landlords? At least the government is now having the debate. Perhaps the Tories are serious about property ownership for the majority.

    Report on 16 April 2012  |  Love thisLove  1 love
  • bobmattfran
    Love rating 58
    bobmattfran said

    Aquasponge Dream on. The writer of the article admits in one breath taking calls for his small flat in an ex Council block. One of the reasons that is key to young people on low incomes not being able to afford housing is the lack of Public Housing. Can you remember which government sold off Public Housing to tenants at a heavily discounted rate? The result of course is what we see today, overpriced ex council property making a profit for people who did not even pay the going valuation rate for property which was originally funded by both the taxpayer and the rate payer/council tax payer. All this so Thatcher could trumpet the lie about the UK being a property owning democracy. no i don't think the present government give two hoots about young people being able to afford a property, because the young people today are more street wise and are not natural Tory party, big business, dodgy banks supporters.

    What the article does highlight in a rather round about way, is the fact that some people with buy to let mortgages are worried, so they should be. Property first and foremost is a home to the majority of us and a secondly a long term investment. It is not a piggy bank for financing cars, foreign holidays, conservatories, furniture or worst of all trying to raise the deposit on another property. The sooner the housing market settles down, and the money that sloshed around in Banks was used to manufacture goods or services to create real wealth, the sooner the country will start to move forward. The present over valuing of property is dangerous, dishonest and only ever produces wealth for the financial lenders, to the rest of us mere mortals it represents hopefully a long term manageable debt which will leave at the end of term a debt free capital asset, any thing else in the short term is high risk driven by greed.

    Report on 16 April 2012  |  Love thisLove  1 love
  • meldrewreborn
    Love rating 44
    meldrewreborn said

    bobmattfran

    House prices are high but you use the phrase "over valuing of property". My contention is that prices are market driven and whatever the market price is at any one time is the right price, high low or indifferent. The reason house prices are high is that demand is increasing because people are living longer, in smaller average household sizes and we have net immigration. We need many more homes and we're not building enough. Build more and prices will come down.

    As to the selling off of council homes, the sad truth is that in many areas these properties are so cheap that the existing tenants will never ever move out of them into the comparatively more expensive private letting sector. Therefore selling the properties off to their occupiers makes little or no difference to the housing market.

    In my view all council rents should be raised to the level of local commercial rents. If people have low incomes then they claim Housing Benefit, just like other renters do.

    Why should a council rent be subsidised in perpetuity irrespective of the means of the occupier? Granted when first occupied the tenant passes a test but after that nothing - and people may live in the same cheap property for 50 years or more - I know of several people who have done just that.

    Why should council tenants be better off than those who rent privately?

    Have you ever thought what the main factor is why people waiting years and years for a council property? Its because its ridiculously cheap! Waiting lists would be eradicated very quickly if these properties were charged at commercial rates. People who once needed a 3 bed property but hang on to it as empty nesters would downsize and free up that accommodation for people who really need it. Council estates become communes of trapped tenants who can't or will not move out because alternatives are financially unattractive. remove the financial attraction and we'll see how quickly things would change.

    There is no logical reason why those in council accommodation should be financially advantaged over those locally living in a private property claiming housing benefit.

    Report on 17 April 2012  |  Love thisLove  2 loves
  • yocoxy
    Love rating 132
    yocoxy said

    Rental returns are just off their peak and it's "the end of the boom"? I'm still more than happy with the rents I achieve, happy with the continuing low interest rates and there's a long way to go before it becomes a bad investment..

    Rental returns in very high rent areas which will be hit by the housing benefit cap will come off their peaks (that's the whole idea of the policy, to stop unrealistically high rents being paid by taxpayers) but I see no evidence of falling rents elsewhere.

    Report on 18 April 2012  |  Love thisLove  0 loves
  • Lawrence.
    Love rating 0
    Lawrence. said

    Bob makes some interesting points, however I disagree totally on one point.

    I think all commercial rents should be reduced to the same as the council rents. This would stop buy to let barons buying up all the cheaper properties where in most cases they can then rely on the taxpayer to pay their mortgage.

    This would free up a whole load of properties for the first time buyer.

    It would also prevent to a degree areas (like mine) being turned into ghettos.

    Rents are much higher than they should be, as the article stated, mortgage goes up, rent goes up. Most people have no choice, they have to live somewhere, and that is unfair.

    Report on 19 April 2012  |  Love thisLove  0 loves
  • poppasmurf
    Love rating 31
    poppasmurf said

    The problem is jobs are in the popular towns. Unless your rich or have money spare to live where ever you want or your new boss doesn't mind you living 700 miles North of London and trusts you to do your job. Then your stuck. Your stuck with moving to the popular places for work. Even though we live in a digital internet age oh well. Either the housing stock isn't up to standard or we as the human race need to change our view on work in the digital age.

    Report on 06 July 2012  |  Love thisLove  0 loves
  • poppasmurf
    Love rating 31
    poppasmurf said

    Actually what we really want is the standardization and capping of rents like they used to be in the 1920's in the UK. Or if you like its fancy name "RENT CONTROL" by the government. eek!.

    That would really shake the chaff from the wheat.

    I don't believe today that the rents are fair they are paying for someones mortgage or life style at the end of the day.

    Report on 06 July 2012  |  Love thisLove  0 loves

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