Monday, April 23, 2012
Hometrack looks beneath the headlines of the rental market
Its key findings show:
- two very distinct markets - one in London and another for the
rest of the UK, with rents in London broadly double those for a
comparable property elsewhere.
With the exception of London, rental growth in 2011 was lower than
in 2010 across all regions. Rents in London were up 9.6% in 2011
and, although growth has slowed since Q3, it remains stronger than
the rest of the UK. The continued growth in the capital's rents
reflects the sheer size of the city, the high cost of buying and
the corporate rental sector which drives some of the highest rents
in the country. In contrast, demand across other cities is largely
domestic, driven by those unable to access owner occupation.
- that affordability pressures on tenants mean that rental growth
is expected to remain relatively subdued. On average Hometrack
expects rents to rise by 2-3% in 2012, pushing gross yields
slightly higher towards 5.5% by the year end.
- a highly segmented sector where typically the bottom 25% of the
market comprises private tenants in receipt of housing benefit; a
larger 'core' rental market, where households are unable to buy
outright or who wish to maintain flexibility and at the top end, a
rental market driven by corporate lets but subject to the
volatilities of the wider economic cycle.
- In London 22% of lettings are over £2,000 pcm for a
typical two-bed property whilst outside London just 4% of lettings
are over £1,000 pcm.
- The core London market, where tenants typically pay between
£1,000 - £1,500 pcm, accounts for 37% of the private rented sector.
Outside London, rents in the core market are typically set between
£500-750 pcm - representing some 50% of the overall lettings
- the profile of lettings and voids risk varies across rental
market by location and value band. The prospects for rental growth
in sectors reliant on housing benefit will for example, be
influenced by new benefit caps imposed by the government as part of
their welfare reforms. The core market offers prospective investors
and lenders the deepest pool of demand and even if mortgage
availability improved this market would not erode
- the dynamics of renting versus buying vary across the country.
On benchmarking the cost of renting to an 80% loan to value (LTV)
first-time buyer mortgage, a clear north/south divide emerges.
Renting is only cheaper than buying in cities such as London,
Bristol, Oxford and Cambridge, where the cost of getting on the
property ladder is prohibitively high.
- in lower capital value markets tenants are paying a premium to
rent over the cost of buying an equivalent property.
- local market dynamics dictate the sustainable LTV that an
investor is able to withstand for a given level of rent. Assuming a
5.5% interest rate for a
buy-to-let loan and rents equating to 125% of the interest payments
rates on the mortgage, the maximum sustainable LTV in high capital
value areas is less than 75%. In London the maximum LTV stands at
55.4%, in Edinburgh 66.8% and Oxford 67.6%. In other areas of the
country, the maximum sustainable LTV is much lower - 91.5% in
Birmingham, 88.4% in Manchester and 87% in Southampton.
- European Union plans to introduce new regulations for the
buy-to-let sector could limit the scale of future expansion.
- regulations aside, affordability factors will continue to limit
rental growth. The majority of renters are would-be first-time
buyers but as tenants - rather than owner occupiers - they have not
felt the benefit of lower mortgage rates on their household
budgets. Furthermore renters are more reliant on unsecured loans
and borrowings where interest charges have risen in recent years.
The net result is that renters are price sensitive and there is a
maximum level to which they can afford to pay for rent versus other
- London data from the English Housing Survey reveals a clear
trend towards greater sharing and cohabitation as a means of
meeting higher rental costs. Rather than simply renting a
two-bedroom flat and retaining a spare room, couples are choosing
to let their spare room to a third tenant. Analysis of renting as a
percentage of income needs to take this trend into account.
Commenting on the Insight Paper, Richard Donnell, Director of
Research at Hometrack, said, "The rise in private rents has
been driven by growing tenant demand and a shortage of supply. With
no major improvements in mortgage availability likely in the near
future so rental demand is set to remain strong. There is however a
limit as to how high rents can go as affordability constraints
continue to squeeze household budgets. Increased occupation of
rented housing through greater sharing is one solution to
affordability pressures - especially in London. Although less
prevalent elsewhere, increased sharing could help absorb further
rent rises and become more commonplace in future. Put simply, with
household incomes under downward pressure rents are doing well to
rise. Looking ahead, Hometrack expects the overall rate of rental
growth to moderate over 2012."