It may seem an unusual combination but there have been increasing reports of property prices falling and at the same time increases in rents. Why is this the case and can it continue?
Firstly it is worth looking at rental yields. Over the last 5 to 10 years rental yields have fallen to a level where for much of the South East UK a yield of 5% was typical (although yields where higher in some areas such as North East UK).
In part the low 5% yield was down to property prices being driven upward whilst at the same time the rental market was effectively capped by affordability, thus as house prices increased rental yields fell.
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Now we have a situation where the recessionary impact on rents has eased allowing rents to increase in some areas. At the same time property prices have fallen. The upshot is that rental yields of 6% are now becoming more common in the South East. But what about the longer term?
In the medium term there will be some negative impact on rents due to housing benefit changes but there are longer term upward pressures on rents, in particular two;
- Mortgage financing is becoming more difficult, and with international agreements for banks to increase liquid assets (Basel III) this shows no sign of abating. This could mean an increasing proportion of the UK population turning to tenancies rather than home ownership.
- There is a growing UK population which is not being matched by an increase in new homes being built. This will create an increased demand for housing and thus tenancies.
The upshot is in the medium term there does seem to be a trend of falling house prices and increasing rents. But in the longer term property prices will start to rise but we will probably see improved rental yields compared with the last decade.
