Rent rises slow by half over course of 2013

  • Rents rise 1.5% annually, down from 3.2% rise twelve months ago
  • After a 1% monthly fall, average rent in England and Wales now stands at £745 per month
  • Landlords make average annual return of over £14,000 as house price rises accelerate
  • Tenant finances suffer over festive period, as proportion of all late rent rises to 9.7%

Annual rent rises have halved over the course of 2013, according to the latest Buy-to-Let Index from LSL Property Services plc, which owns the UK’s largest lettings agent network, including national chains Your Move and Reeds Rains.

Average rents across England and Wales have risen 1.5% in the past year, to stand at £745 per month in December.

However, this annual rise is half that of a year ago. By comparison, rents increased by 3.2% in the year to December 2012.

On a monthly basis, rents have seen a seasonal drop. The average rent across England and Wales fell by 1.0% (or approximately £8) between November and December.

Despite a winter slowdown, December witnessed annual growth in lettings activity. The number of new tenancies agreed across England and Wales increased by 7.7% compared to December 2012. However, on a monthly basis there were 12.7% fewer new lettings than in November.

David Newnes, director of LSL Property Services, owners of estate agents Reeds Rains and Your Move, comments: “Very gradually, the clouds are clearing for tenants. Households have suffered from the most painful recession in living memory, but it’s clear we’re now coming out the other side.

“By investing heavily in the supply of more homes to rent landlords have played a pivotal role. Now it remains for the rest of the economy to lift real earnings, and by so doing, lift even more households out of trouble. But prospects look good. Early indications show wage expectations are starting to look up – and general inflation is under control again. If this can take hold, more prosperous tenants will make for a more prosperous private rented sector in 2014.”

Rents by region

Seven out of ten regions saw rents fall on a monthly basis between November and December, in line with a monthly fall across England and Wales as a whole.

The sharpest monthly drop was found in the South East, with rents down 2.0% since November. This was followed by a fall of 1.9% in both London and Wales.

However, the North East and West Midlands experienced rent rises on a monthly basis – up by 1.5% and 1.4% respectively. Rents in the South West also rose slightly on a monthly basis, up by 0.7% between November and December.

On an annual basis, London saw the steepest rent rises, up 4.0% from December 2012 (or £44 in absolute terms). This was followed by a 3.2% annual increase in the South West, and a 2.5% rise in the South East.

However, some regions experienced annual falls. Rents in the East of England fell the most, down by 4.4% (or £33) over the last year. This was followed by a 2.7% annual drop in the West Midlands, and with rents in Yorkshire and the Humber 2.1% lower than in December 2012. Meanwhile, with zero annual change, rents in Wales have returned to the same level as twelve months ago.

David Newnes comments: “The difficulties and frustrations of buying a home are far from uniform across Britain – or even from one town to the next. And the complexities of each local rental market reflect that. However, slower but sustainable annual rent rises are the order of the day in most areas. Local knowledge will be valuable, but improved affordability is good news for tenants and landlords alike.”

Yields and Returns

Gross yields on a typical rental property remained steady at 5.3% in December, consistent with the past three months. However, taking into account capital accumulation and void periods between tenants, total annual returns on an average rental property rose to 8.8% in December. This compares to 8.3% in November – with the increase due to accelerating house price rises. In absolute terms this represents an average return of £14,372, with rental income of £8,189 and capital gain of £6,183.

If rental property prices continue to rise at the same pace as over the last three months, the average buy-to-let investor in England and Wales could expect to make a total annual return of 6.6% over the next 12 months, equivalent to £11,234 per property.

David Newnes comments: “Steadier rent rises, and the usual seasonal dip over the winter shouldn’t put off anyone considering a buy-to-let investment. Returns have picked up considerably over the last six months, underpinned by solid rental yields and boosted by rejuvenated chances of capital appreciation. Rents will keep rising on an annual basis for the foreseeable future, while buy-to-let mortgages are still becoming more available and at more affordable rates. Supply of housing is still seriously restricted in the UK, so much-needed investment looks set to be handsomely rewarded as demand is driven further by an economic pick-up in 2014.”

Tenant Finances

Tenant finances suffered a setback in December, with the total amount of late rent across England and Wales reaching £330 million, up £102 million since November 2013. As a proportion, such tenant arrears now represent 9.7% of all rent, up from 6.6% in November, but still lower on a yearly basis than the 10.1% seen in December 2012.

David Newnes concludes: “While general inflation is back under control, and rents are rising even more slowly than this, household budgets have still been stretched and squeezed from every direction.

“The culprit is wages, which haven’t kept pace with the rising cost of living for years, and the underlying cause is the biggest economic storm for nearly a century. Landlords have invested heavily in new homes to rent, which has helped keep rent rises below inflation. But this can’t be relied on forever. A lack of house building could be the next serious crunch on the horizon, and this fundamental restriction on places to live needs even more attention.”

 

First-Time Buyers Rise 28% Year-on-Year in November as Average Mortgage Rates Fall to Lowest in Three Years

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The number of first-time buyers climbed 28% year-on-year in November thanks in part to the lowering of mortgage rates by lenders, according to the latest First Time Buyer Tracker from LSL Property Services.

 

Transactions

Average Purchase Price (£)

Average LTV

November 2013

27,800

£149,404

81.3%

October 2013

26,800

£149,375

81.1%

1 month change

+3.7%

+0.0%

+0.2% (from 81.1%)

3 month change

+5.3%

+1.7%

+1.0% (from 80.3%)

1 year change

+28.1%

+11.4%

 +2.2% (from 79.1%)

There were 27,800 first-time buyer sales in November, 6,100 more than a year ago, showing improvements in the first-time buyer market are gathering even greater momentum.

The average first-time buyer LTV rose to 81.3%, the highest since September 2011, in a sign of the increased availability of mortgages as banks become more willing to lend to those with smaller deposits. As a result the average deposit size fell to £27,942, a 3.4% fall in the past three months, attracting more aspiring buyers back into the market.

Deposits consequently now represent a smaller proportion of first-time buyer incomes, with the average deposit of a new buyer equalling 76.6% of annual income, a 5.8% fall over the course of the last twelve months.

The increase in first-time buyer activity has also been fuelled by the improved affordability of mortgages. In November the average mortgage rate fell to 3.93%, down 0.8% since last year, with banks having being able to pass cheap credit from Funding for Lending onto borrowers.

But there are warning signs ahead, with rising house prices potentially threatening to price the next wave of first-time buyers out of the market. The average purchase price for a first-time buyer rose by 11.4% year-on-year in November, and now stands at £149,403 – up £15,340 in the last twelve months.

Similarly, although the cheaper rates meant that mortgages were more affordable for first-time buyers, the proportion of income represented by mortgage repayments is starting to creep up as house prices rise. Mortgage repayments have increased 0.1% in the past month and 0.4% over the past three months, despite consistently falling mortgage rates.

First-Time Buyer Affordability

 

Average deposit (£)

Deposit as proportion of income

Average mortgage rate

Mortgage repayment as proportion of income

November 2013

£27,942

76.6%

3.93%

21.0%

October 2013

£28,243

77.5%

3.94%

20.9%

1 month change

-1.1%

-0.9%

-0.01%

+0.1%

3 month change

-3.4%

-3.6%

-0.02%

+0.4%

1 year change

-0.4%

-5.8%

-0.79%

-0.2%

David Newnes, director of LSL Property Services, owners of estate agents Your Move and Reeds Rains, said: “There has been a revival in the first-time buyer market over the past twelve months, with sales increasing by nearly a third. Mortgages are much more affordable, which has opened the door to welcome in thousands of aspiring homeowners who had previously been locked out of the market. A boost in economic confidence has attracted more buyers back to bricks and mortar, while banks have equally been far more prepared to lend to those with smaller deposit sizes.

“Rates have fallen, and there is now an array of attractive deals on offer for shrewd first-time buyers, which has made mortgages far easier to secure. The spark has been government schemes like Funding for Lending and the equity loan first phase of the Help to Buy scheme. Although Funding for Lending has been cut back, the mortgage guarantee scheme, second phase of Help to Buy introduced in October, will really kick into gear in the next few months. It will be this that will carry the torch through into 2014.”

“However there is a flipside to the coin. Prices are rising and there is simply not enough housing stock to match continued demand, meaning this will continue well into 2014. If demand is not satisfied by supply, then sustainable growth will be hampered and future first-time buyers will once again be left out in the cold. We need far more homes, particularly at the lower end of the spectrum if we are to sustain a healthy property market.”

On a regional level, there continues to be disparity across the UK with stark differences throughout the country in property values, deposits required and mortgages taken out for those entering the property market. In the three months to November the South East saw the greatest number of first-time buyers, with 15,600 sales across the region, closely followed by London at 13,400. This is despite the fact that first-time buyer properties in the capital and the South East have required the largest average deposits, at £67,623 and £37,788 respectively.

By comparison, in the North West first-time buyers only require an average deposit of £15,791 with an average purchase price of £112,820. This therefore means that new buyers in these Northern regions only have to take out an average mortgage of £97,508, whereas by comparison those in London have an average mortgage of £208,448.

Wales in particular has experienced uplift in first time buyer activity, largely to a required average deposit of just £11,683 and purchase price of £107,038.

David Newnes, director of LSL Property Services, owners of estate agents Your Move and Reeds Rains, concludes: “Although a flag has been planted in the nationwide recovery, up and down the country we are seeing contrasting fortunes for first-time buyers eager to enter the property market. Price rises in the capital and South East are surging ahead of those in the rest of the country, and the resulting deposits needed to get onto the ladder are following suit. Buyers in the North are faring better in this respect. They have less of a mountain to climb to reach the summit of the required deposit.

“However, while potential homeowners in Northern region have smaller deposits to accrue, they are – as a whole – less cash-rich than those in the capital and the surrounding areas, which therefore necessitates them taking out higher LTV mortgages. With many anticipating a rise in interest rates next year, many new homeowners across the country will feel a greater pressure on their finances – especially with repayments as a proportion of income starting to creep up.

“It is startlingly evident that while the UK-wide latest phase of the Help to Buy scheme is having a positive effect, a more tailored and less of a ‘catch all’ approach is needed.  One that meets the varying needs of aspiring buyers across the regions. This will be crucial in alleviating the regional disparity and preventing the wall of obstacles that first time buyers have to scale from mounting further.”

Paper Summary: 20th December 2013

In Friday’s papers…

Economics

Businesses will be paid to cut their energy use on winter evenings next year, amid warnings from Ofgem of increased risk of power shortages by the middle of the decade. The National Grid will ask businesses to reduce electricity use between 4pm and 8pm – the peak demand period for households – forcing the government to deny that we are heading towards a sustained wave of blackouts reminiscent of the 1970s.  The cost of running the scheme however, is likely to fall on consumers’ energy bills, and the measures would also have serious ramifications for the nation’s productivity and economic recovery.  The fact that these measures are deemed necessary is being viewed  as proof that not enough wind turbines are being built to cover the fall in Britain’s electricity-generating capacity, as many coal and gas-fired stations are closed to meet government promises to cut carbon emissions. (FT p.1., Mail p.2, Guardian p.34, Times p.20)

Personal Finance

The Bank of England has highlighted the rate-setting dilemma facing the government as the economy recovers, warning that heavily indebted homeowners will be hard hit if interest rates start to rise before wages have picked up. Their research finds that if interest rates were raised to 3% from the current record low of 0.5% it would almost double the proportion of “vulnerable mortgagors” (who spend at least 35% of their pre-tax income on repayments) to 16%. The Independent claims that nearly 1 in 6 households would be at risk of losing their homes.  It comes as strong jobs data this week raised the prospect of an earlier rise in interest rates, but Carney has signalled he wants wages to pick up first. (Guardian p.33, Times p.49, Independent p.55, Telegraph Business p.1)

Property

Rents are rising twice as fast as wages, according to the latest buy-to-Let index from LSL Property Services. Rents are up 1.6% over the last 12 months, compared to only 0.8% annual growth in weekly earnings. David Newnes comments that “for many households, the dream of home ownership is still relegated to the imagination”, as the pressure on tenants’ finances make saving up for a deposit a real struggle. (Mirror p.62, Metro p.16)

The British housing market is ending the year strongly with mortgage lending rising by 30% in November, according to the CML.  The Mortgage Advice Bureau revealed that in November the number of mortgages being marketed to borrowers broke through 12,000 for the first time in four and a half years, more than three times the number on offer in April 2009. (Guardian p.33)

Paper Summary: 18th December 2013

Property
A new record 400,000 property owners are now property millionaires, that’s translates as twice as many as five years ago according to Zoopla. The number of homes worth £1 million or more has increased by a third over the past twelve months, thanks to soaring house prices in London and South East. The lack of supply of new homes in the capital was to a great extent responsible for driving forward a further 57,120 over the £1 million mark which equates to 156 new property millionaires a day in the capital throughout 2013, as shown by Zoopla. Prices are still rising according to the latest ONS figures, by 5.5% in the past 12 months, and the rise is even higher in London, jumping by 12%. Marsh & Parsons highlighted that prices are at more than double the rate of other areas , while Prime London continues to be a honeypot for UK and overseas buyers, as demand remains intense. As a result, LSL highlights that first time buyers are still having to leap higher than ever before to join the property ladder.

Personal Finance
Over half of UK shoppers are heading to discount shops, visiting an Aldi or Lidl figures revealed, for the first time ever. More than 13 million used the budget stores in the past three month, up from 46.1% a year ago. As a result all of the big four grocers have lost market share, as the so-called budget shops now make up a combined seven per cent of the total market. Credit crunch bargains are proving attractive across the country, as value continues to be a great incentive. Although Lidl and Aldi may not be as prevalent in London, more common in regions where shoppers can drive to do a food shop, this is likely to change, as more shops are expected to open next year. The type of customers are also said to be changing – those known as ABC1s (the traditional middle classes) make up just 25% of shoppers in 2011. Last year that rose to 41%, proving that Aldi is no longer the store of the cash strapped student.

Economy
Britons believe that securing growth as their top economic priority is more significant than higher wages according to a survey for the Independent. The ComRes survey findings suggest that the Conservatives message on the economy may resonate more than Labour’s campaign on reducing the cost of living. Their competing messages will lead to a fierce battle in the run up to the 2015 election. It’s interesting to note that in a list of important priorities over the next five years from a range of options, at the top was ensuring the economy continues to grow, followed by ensuring wages increase faster than prices, thirdly keeping inflation down and finally reducing the deficit. Now that the economy is growing the Tories will take comfort in the fact that that the findings show people view growth as the top factor.

Recruitment
More than half of the UK is said to be ripe for fracking according to a new Government report by engineering giant Amec, that shows a shale gas boom could create up to 32,000 new jobs. These plans have been met with mixed responses with some arguing it will cast a dark shadow over many communities in Britain who could now face the threat of fracking in their backyard. A new licensing round to enable firms to search for shale gas will begin in the summer. There could be between 14 and 51 vehicle movements to a fracking site each day over a 32 to 145-week period which could have a serious impact on traffic congestion, noise or air quality, depending on existing roads, traffic and air quality.

LSL / ACADATA ENGLAND & WALES HPI

House prices up £11,219 from a year ago, fastest rate in three years

  • Prices rise by £1,400 in November, reaching new record
  • On an annual basis prices increase in all regions for the second consecutive month
  • By the end of 2013 sales set to be 16% higher than 2012

 

House Price

Index

Monthly Change %

Annual Change %

£238,839

243.2

0.6

                     4.9

David Newnes, director of LSL Property Services plc, owner of Your Move and Reeds Rains estate agents, comments: “The housing market is almost unrecognisable from twelve months ago. Not only have average prices climbed to a new record high – with an annual rise of £11,219 and a monthly increase of £1,400 – but we’ve seen an increase in every region for the second month running – a true sign that the nationwide recovery is really taking off. The LSL house price index incorporates all transactions including cash.

“Competition is strong through rising demand and supply of new instructions not growing , a factor that will continue to prop up prices in the long term. Confidence is higher throughout the market, with the Help to Buy scheme and record low interest rates contributing to the positivity. Over the second part of this year, consumer confidence has snowballed as the economic picture improves, leading to a significant rise in sales. The increased availability of mortgages, in part thanks to the government’s schemes, and the greater range of mortgage deals on offer has swung open the door to a new host of first-time buyers, making the distant dream of homeownership now a reality for thousands.

“Strong headway is finally being made towards a universal recovery. All ten regions in England & Wales experienced positive movement in prices on an annual basis for the second time in three years. Annually prices have increased in over 80% of local areas up and down the country – the highest percentage since September 2010. The trajectory is clearly upwards. Record high house prices have not only been recorded in the capital, but also in areas of the South East including Oxfordshire, Hertfordshire and Cardiff.

“However, there is still uneven growth in property values across the country. London prices continue to race ahead in a different gear with 9.2% annual growth in the capital vastly outshining the rest of the UK. Between August and October sales in London were up 27% on the same three months in 2012, reflecting intense demand for properties in London, both from domestic and abroad.

“In his Autumn Statement the Chancellor unveiled plans to unleash a further £1 billion to unblock housing development to address the critical shortage in supply. This will play a role in preventing prices rising too far too fast. But this is only the beginning, and it’s vital that house building is given greater attention in 2014 and beyond, in order to ensure the recovery rolls forward at a sustainable level.” 

Late Rent Lowest Since 2008

  • Levels of late rent healthiest since 2008 – tenant arrears drop by £50 million in October
  • Comes despite new high for rents across England and Wales – at £758 per month
  • Rents rise 0.2% in month since September, up 1.9% from a year ago
  • Demand for tenancies remains strong, up 7.4% since October 2012

Tenant arrears are at their lowest since 2008, despite a new record for rents across England and Wales, according to the latest Buy-to-Let Index from LSL Property Services plc, which owns the UK’s largest lettings agent network, including national chains Your Move and Reeds Rains.

Average rents across England and Wales rose to £758 per month in October, after a monthly increase of 0.2% (or approximately £1) since September.

Annually, this leaves rents 1.9% higher than October 2012 – and at a new all-time high.

October also saw lettings activity accelerate on an annual basis. The number of new tenancies agreed across England and Wales increased by 7.4% compared to October 2012. This was despite a minor slowdown on a monthly basis, with 1.6% fewer new lettings than in September.

While as a whole rents across England and Wales rose on a monthly basis, seven out of ten regions saw rents fall between September and October.

The fastest monthly fall was in the West Midlands, with rents down 3.6% since September. This was followed by a fall of 2.4% in the East Midlands and a monthly drop in Yorkshire and the Humber of 1.7%.

However, the South East experienced rent rises of 2.4% between September and October, while rents in the South West rose 1.5%, and London saw rents rise on a monthly basis by 1.3%.

On an annual basis, London saw by far the sharpest rent rises – 4.9% higher than in October 2012. While this was followed by a 3.1% annual increase in the South East, Wales matched this figure, with Welsh rents also 3.1% higher than a year ago.

Meanwhile, rents in the East Midlands have fallen over the last year by 3.9% (or £30). This was followed by a 1.5% annual drop in the North East, while rents in the West Midlands are now 1.2% lower than in October 2012.

David Newnes, director of LSL Property Services, owners of estate agents Reeds Rains and Your Move, comments: “At a time when a seasonal slowdown would usually be expected rents are up again. The lettings market appears to be experiencing an extended Indian summer. Normally we can expect the rush of early autumn to fade into a late autumn hibernation. Even as the nights draw in, demand for homes to rent seems unabated, and still well ahead of a year ago. While buying a home is certainly getting easier, it’s the private rental market which is taking the strain for the majority of new households. With below inflation rises it is renting which is still relatively affordable in the face of struggling wage growth and rock bottom savings rates.”

Gross yields on a typical rental property remained steady at 5.3% in October, the same as in September. However, taking into account capital accumulation and void periods between tenants, total annual returns on an average rental property rose to 9.7% in October. This compares to 8.4% in September – with the increase due to accelerating house price rises. In absolute terms this represents an average return of £15,837, with rental income of £8,277 and capital gain of £7,560.

If rental property prices continue to rise at the same pace as over the last three months, the average buy-to-let investor in England and Wales could expect to make a total annual return of 14.5% over the next 12 months, equivalent to £24,921 per property.

David Newnes comments: “Rents are still rising, but the pace of change is stabilising – a sure sign of health for the lettings market. Even before the latest wave of price rises, plain rental yields are stable and set to grow. Moreover, with tenant finances improving, those yields on paper will be more easily realised. Yet on top of rental income, surging capital accumulation is delivering another source of confidence. As prices rise, not only does the importance of a relatively affordable rental market increase, but the incentives for landlords to expand their portfolios are growing too.”

Tenant finances saw a rapid improvement in October, with the total amount of late rent across England and Wales falling by £49 million since September – to £245 million. As a proportion, this represents 7.1% of all rent, down from 8.5% in September. On an annual basis tenant arrears have also improved, with the total amount of late rent down by £28 million since October 2012, and also down as a proportion on an annual basis, from 8.1% of all rent in arrears in October 2012.

October’s measure of tenant arrears – at 7.1% of all rent – represents the healthiest month for tenant finances since LSL began recording this data in November 2008. During that month five years ago, 13.1% of all rent in the UK was in arrears.

David Newnes concludes: “Until we can boost homebuilding to the tune of an extra 200,000 a year, rents will keep rising on an annual basis. Yet annual rises are still below inflation. Without a doubt households don’t have cash to burn at the moment. So the fact tenants have paid down late rent to such an extent is testament to the professionalism of landlords, the availability of advice for tenants, and the stability of the entire industry.

“The first rung of the housing ladder is still a big step up. Despite a healthier circulation of mortgages, even a 5% deposit is fast becoming a challenge for many would-be first-time buyers. For the foreseeable future a healthy private rented sector will be as critical for the UK economy as it is for those besieged every month with other household bills.”