There is a limit to how high rents can go

So says a new report from Hometrack on the UK rental market

In an overview of the report, 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.

The report’s key findings are:

London

  • Rents in London are broadly double those for a comparable property elsewhere. The average weekly rent for a two-bed in Central London is £600, the highest in the country. The cheapest is £115 (Nottingham).
  • In London 22% of lettings are over £2,000 pcm for a typical 2 bed property whilst outside London just 4% of lettings are over £1,000 pcm.
  • 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 reflect 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.
rental market 2 There is a limit to how high rents can go

The Regions

  • The UK rental market is a highly segmented. The bottom 25% is made up of private tenants on 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.
  • With the exception of London, rental growth in 2011 was lower than in 2010 across all regions. Demand across other cities is largely domestic, driven by those unable to access owner occupation and affordability pressures on tenants mean that rental growth is expected to remain relatively subdued outside the Capital. On average Hometrack expects rents to rise by 2-3% in 2012.
  • 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 sector.
  • 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.

rental market There is a limit to how high rents can go
Investment

  • 2011 saw a 32% increase in buy-to-let lending as investor demand grew. Local market fundamentals dictate the maximum sustainable LTV which for high capital value markets is lower than 75%
  • European Union plans to introduce new regulations for the buy-to-let sector could well limit the scale of further expansion in this sector.
  • Yields have improved modestly in the last four years and now average 5.3% gross. While better than low savings rates, investment in residential property is still motivated by an expectation of capital growth.
  • Private rents are rising on the back of growing tenant demand and static supply but the profile of growth varies across markets. With little sign of any material improvement in mortgage availability, rental demand is set to remain strong. The appetite for investing also remains strong with a 32% increase in gross lending in buy-to-let over 2011.

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