The UK property market has registered a fall in year-on-year rental values for the first time since 2009. This may surprise many people but there is an array of factors which appear to be hitting the rental market. It will be interesting to see whether this phenomenon is short lived or whether we are looking at a correction in rental values, many of which had risen to levels which were quite frankly unsustainable. So, what is the picture of falling rents in the UK?
Rental growth turns negative
A report by Homelet has cast a very interesting light on the UK rental market because while some regions are still posting relatively small gains others, such as London, have seen a significant reduction in rents charged. While many are describing this downturn as a “significant moment” for the UK housing market it is too soon to talk of a long-term downturn especially when you look at the UK housing crisis and the growing population.
If we sit back and look at demand for rental properties in the cold light of day, we have a population that continues to grow, we have a shortage of affordable housing and the newbuild market is tens if not hundreds of thousands of properties behind the curve. Against this background you do get the impression that this may well be a short-term phenomenon until rents rebase at lower levels.
Fall from grace
When you bear in mind that rental inflation reached 5% in the middle of 2016, only 12 months ago, this is a fairly sharp turnaround to a 0.3% reduction in the year to May. The situation in London is even worse with a fall of 3% in rental charges compared to the same period last year. There is no doubt that the UK property market as a whole is taking a breather and with Brexit, potential Scottish independence and the forthcoming UK election, who can blame investors?
There are growing concerns that buy to let investors who have heavy exposure to the UK could see their margins squeezed significantly even if rents were to fall for just a few months. An increase in related buy to let taxes and other costs has seen profit margins fall and a reduction in rental income could push some investors over the edge. Many were warned at the time that they should not over extend their finances in the buy to let market even if at the time it did seem as though the rise would go on forever.
Falling rents equate to falling house prices
House prices have been falling in some parts of the UK for the last few months and the fall in rental values will have an impact on the UK property market going forward. The simple fact is that if rental income falls then in order to maintain historic rental yields the perceived value of the property must also fall. We know that there is still a backbone of strong interest in the UK property market but whether they’ll wait until markets steady at lower levels of perhaps start picking up “cheap stock” today remains to be seen.
It is also worth mentioning that an increase in the number of mortgage arrangements with relatively small deposits has also hit the rental market. Will first-time buyers finally be able to jump onto the property ladder?