Assetsure News 19th August 2008

Rents Go Up While House Prices Go Down

The effects of the credit crunch on falling UK house prices is forcing more and more homebuyers to choose to rent instead of buy. Average reductions in asking prices of £5,000 have been reported amongst estate agents. Those homebuyers not wishing to sell, but needing to move for other reasons, are choosing to rent instead. There are lots of reasons why people have to move home; people moving between jobs in different parts of the country, people getting married or divorced, and couples expecting babies. For these types of people, it is becoming increasingly difficult to sell their property and buy elsewhere.

The huge difficulties in obtaining a mortgage for ordinary families are forcing people to adopt to rent in the meantime while they save for a larger deposit. Others are simply choosing to sit on their hands until prices stabilise and first-time buyers come back into the market. Ironically more and more homebuyers are becoming landlords while they choose to rent elsewhere. This has caused a return to positive gross yield for the UK buy to let market. A recent report by the Royal Institute of chartered surveyors found that the demand from tenants is at it's fastest since July 1998. The advantages for tenants is that their maximum financial commitment extends to the term of the assured short hold tenancy agreement. They can live without worrying about whether they are falling into negative equity. The report also found that new instructions to let properties is increasing it's fastest rate since records began in 1998. RICS said many would-be-sellers found that becoming a landlord is a better option than selling in the current climate.'The lettings market is booming with many vendors opting to rent their property while sales in the housing market continue to dry up,' said RICS spokesperson James Scott-Lee.'Becoming a landlord is now an increasingly profitable option with rising rents and yields offering good returns,' he added.

The effect of an increasing number of tenants in the market is an average rent rise. The old rule that when house prices fall, rental prices rise is appearing to hold true. Another indication that landlords are beginning to return to the market with an increased sense of long-term optimism, is that the report found that landlords opting to sell the property, at the expiry of the tenant lease, fell to it's lowest level on record since 2003. Paradoxically, the number of approved landlord buy to let mortgages is at an all-time low as lenders remove themselves from the risk of bad debt. The main types of properties that are in demand from tenants are larger houses as opposed to flats. These were strongest in the Midlands and in Wales and the North, in London and the southeast/. From investment point of view, gross yield is the key statistic that landlords use to compare their returns, competitive forms of investment. In the last year huge number of landlords have seen a gross yield fall into negative because, meaning a cash negative outflow every month as increasing landlord mortgage costs outstripped rents received.

However, a recent and somewhat contradictory report by Skandia found that buy to let investors are planning to withdraw £18 billion out of the property market in the coming years, due to nervousness regarding profitability. This represents a market shrinkage of about 30%. The biggest impact has been in the purpose-built blocks of flats and apartments sold as investments where amateur landlords have bought at the wrong time and are now having to fund empty properties. The oversupply of converted and purpose-built blocks of flats is a big problem for inner-city landlords. With the International monetary fund commenting today that worst is yet to come in the global financial markets, the prospect of cheaper buy to let mortgages seems bleak for many existing landlords seeking to remortgage and reduce their ongoing overheads. Skandia's study noted that amount of money withdrawn from the buy to let market through landlords exiting through selling their property would continue to squeeze house prices down. Nick Poyntz-Wright, chief executive of Skandia UK, said: "Private investors have accumulated significant amounts of equity in buy-to-let properties after a long period of strong growth in home and flat values. Higher mortgage rates and falling property prices will cause investors to reconsider their exposure".

This report shows the fragility of the rental market and it's diversity in structure. While in the city rental investments in blocks of flats continue to struggle, there is increased and healthy demand from families family homes in more suburban and rural areas. Another example of local conditions impacting property prices in rental values is in student towns across the UK. Students are now paying higher rents on average and landlord investors in those towns such as Nottingham, Manchester enjoying higher gross yields than the national average. The constant supply of students needing to rent in a local geography is sustaining yields and protecting landlords from economic chaos that is impacting the wider housing market. The importance of buy to let investors cannot be ignored as they represents 10% of the entire mortgage stock compared to just 1% 10 years ago. Most landlords take a long-term view and do not expect astronomical returns within a couple of years. However when negative gross yields impact their monthly bank balance, are lots of landlords would prefer to invest in something more stable. Almost 90% of landlords amateur investors attracted by the promise of pensions from property and high gearing. Just like the American experience where homeowners were promised healthy future gains, the speed at which the buy to let market has crashed has taken many amateur landlords by surprise.  

The overextended landlords can no longer find cheap mortgage deals and the low deposits and so remortgaging is becoming a big problem. Research from MoneySupermarket found the number of available mortgages in this sector has fallen from 4,384 to 307 in the past year!. First-time buyers know that there is worse to come and the more bad news is publicised, the more first-time buyers are happy to wait until prices return to a sensible equilibrium. Unfortunately for landlords, the volume of economic migrants from Europe is also slowing down due to the rising cost of living in the UK. Hence there is softening tenant demand and rental property. Despite continued scarcity of in inner cities to build new homes, homebuilders simply do not want to invest in land and property in the current economic climate. It seems inevitable prices continue to fall with the current mix of historical economic pressures both in the UK and from the US. The market does not really believe there is much of a future short-term buy to let mortgage lenders. On Monday investors in Bradford & Bingley had only taken about 20% of the £400 million rights issue it was attempting to raise it all to two bolster it's cash reserves.