The rental market in the UK has drifted over the last year or so with rents in London actually falling year on year according to research from HomeLet. This has led to rental rates nationwide growing by a modest 0.4% in April of this year. In London this figure in fact dropped by 1.7% month on month from March to April 2017.
What does this mean for the rental market, and why have rates been dropping? In general as inflation picks up real wages are in drifting lower leaving households worse off month by month as the pound in their pocket becomes worth less. With this affordability issue in mind Landlords are reluctant to push prices too high for fear of making their properties unaffordable, despite there still being a great demand for properties. This phenomenon has been particularly an issue in London and the South East where inflation in the rental rates, and house prices was greatest leaving rental returns in the last few months at all time lows. Average yields in properties in the South East sits around 2.5% presently.
However, in the North of England and Scotland, areas that have not been subject to this excessive inflation, prices are pushing higher offering better returns to the investor who is comfortable to look further afield to achieve returns that on average sit nearer the 6-7% level. In these areas demand for housing in the rental sector looks set to remain high and with this in mind pressure on rental rates will remain, but landlords will have to be careful how they price their properties in the future as real wages across the country continue to fall. Landlords will have to decide carefully how to react to changes such as the reduction of tax relief on mortgage interest, and whether to pass this onto the tenant.
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