While the market for home buying appears flat, the UK rental housing market is benefiting from the current trend. With the exception of London, British house prices have not been rising, as unemployment figures remain high.
In London, property values have shot upward and Mayor Boris Johnson has moved to build new homes in order to slow down the price rise. As many families are unable to afford these homes or to qualify for loans, they have been turning to the rental market in London instead. Most first-time renters don’t take into consideration all the associated costs of renting like having a professional cleaning company carry out end of tenancy cleaning. Something which most tenancy agreements require a tenant to do before they move out.
Back in late 2011, it appeared that the overall UK market might be ready to bounce back with prices rising across the country at an average of 1.1 per cent. The results were uneven though with London seeing rapid growth while Northern Ireland saw prices dip by 8.9 per cent.
However, the Council of Mortgage Lenders (CML) released figures showing that gross mortgage lending dropped from £12.7bn in July to £12.6bn in August this year. Annually, this was 4% lower than lending in August last year.
A Reuters poll of market experts released on Sept. 18 showed that 14 of 23 participants thought British house prices still had more room to fall. They only expected London prices to rise against this national trend.
The experts expect London prices to rise about 3.0% in 2012 and by 2.0% next year. However, they are pessimistic about the wider housing market prospects with one market observer even predicting a 40% collapse in house prices.
The main reasons for the gloomy views are the high unemployment rate, the double-dip recession and stiff credit requirements for mortgages.
However, as consumers are unable to qualify for loans to buy new homes, they are turning to rentals instead. This is fuelling high demand in the UK rental housing market. Rental prices for UK markets rose rapidly in five regions across England and Wales.
According to LSL Property Service, rental prices for UK markets rose 2.9 percent annually reaching £734 in August compared to a peak of £725 in July.
The situation is far from surprising, as families really have no other option but to rent. In London, the problem is even greater as home prices are rising out of reach of most consumers.
In London and the south-east, about a third of tenants are using more than 50% of their take-home pay for rent, according to real estate website Rightmove. Moreover, the upward price spiral shows no signs of abating.
The average monthly cost of a London flat, for example, shot up 2.3% in August and 5.8% over the year to a record £1,272, according to tenant service HomeLet.
High rental rates are making it difficult for tenants to save money required for a deposit in purchasing a new home. Experts believe that this could “trap” these tenants hindering them from ever becoming homeowners. While this is bad news for the house sales market, it is favourable for the UK rental housing sector.
The Financial Services Authority released figures showing that new lending for house buying remained flat at £40bn in the second quarter with no change from the same period last year. Most of the new loans went to buyers who were able to save up large deposits. Only 2% of the house loans went to buyers with deposits of 10% or less of the house price.
Landlords, on the other hand, were prospering with the rental market in London leading the way. The “yield” on rental investment properties is now averaging about 6% across the UK, according to Rightmove. That figure represents more than twice the amount an investor can earn with a typical savings account.
However, rental markets still vary significantly according to region. While the average rental outside London costs about £684 a month, a 1.9% annual increase, rents in the north-east have been declining for the past three years and are at an average of £524 a month.
In London, prices for both buying a new home and renting a home are rising beyond the reach of low to middle income people. Mayor Johnson’s answer to this dilemma is build new homes, however, many of the projects are languishing. Recently, the mayor revealed to Andrew Boff of the London Assembly that 170,000 homes with planning permission have failed to progress.
One of the reasons for the stalled projects is the huge amount of international speculation currently occurring in the London real estate market. This trend will keep capital rents high well into the future.