This is faster than inflation. Over the same period since May 2010, consumer price inflation (CPI) has amounted to 11.6%. This leaves a 3.6% increase in rents after the effects of inflation – or the equivalent of a 0.7% real terms increase each year over the last Parliament.
Most recently, rents now stand at £768 per month as of March 2015. Annual rent rises have accelerated to the fastest pace in two years, with the average rent across England & Wales now up 3.7% over the last twelve months. The last time rents rose so quickly was in the year to April 2013, when this previously stood at 3.9% per annum.
Between February and March 2015, rents have risen by 0.3% on a monthly basis. This is slightly slower than the 0.4% month-on-month uplift seen between January and February, but the second month of rental growth in a row, after November, December and January all saw rents lower on a monthly basis, as is often the case in the winter months.
After the latest rises, rents are now just £2 away from the all-time record high of £770 per month, set in October 2014.
Adrian Gill, director of estate agents Reeds Rains and Your Move, comments: “Since 2010 the private rented sector has absorbed over a million extra households. With social housing in decline, alongside a parallel decay in the number of people owning their own home with a mortgage, private renting has stood in to fill the gap.
With only small real-terms rent rises, this has generally been a success – and tenants are now half as likely to fall behind on rent as at the peak of the financial crisis. However, this sector is carrying the weight of the housing crisis – and that will mean faster rent rises in future if supply doesn’t keep up. Without more homes every year to match a rising population, housing will inevitably become more expensive. And with one in five households now renting privately, this section of the population won’t be an exception to those fundamentals.
Over the next five years politicians of all stripes can’t just hope that this problem will go away – Britain needs more homes, and over the long term, investment by landlords will only provide places to live as quickly as those homes are given planning permission and completed.”
Rents in the East of England stand out with 12.0% annual growth. The average property to let in the East of England region is now considerably more expensive than the South East.
London is second in terms of annual rent rises with rents in the capital 5.0% higher than in March 2014, while Yorkshire & the Humber has seen rent rises of 3.3% over the last twelve months.
At the other end of the spectrum, rents in the East Midlands are now 0.2% lower than a year ago, while the South West has seen no annual change.
Most recently, rents have also risen the fastest month-on-month in the East of England – up 2.5% just since February 2015. However on a monthly basis the North West is not far behind, with rents up 2.3% over the last month, while this is followed by Yorkshire & the Humber with rent rises of 0.4% since February.
By contrast, rents in the East Midlands have dropped by 0.6% between February and March, while the North East and Wales both saw rents 0.5% lower in March than in February.
Adrian Gill explains: “Generally the quickest rent rises have traced the most buoyant jobs markets – and this matches a very positive picture for the East of England. By similar logic, the East Midlands had previously seen very robust rent rises to rival London, but this has now tapered out. This could be a pause for breath or signal a deeper slowdown for the East Midlands’ previously powering local economy.
Another stand-out area is the North West. Rents in this area are outperforming and on the ground we’ve seen this effect clustered particularly around the potent Manchester economy. It’s clear that the North West powerhouse, centered on Manchester, is fast becoming the London of the North, with a deepening premium compared to areas like the North East, North Wales, or much of Yorkshire.
Each local market can also be split further – into the top and bottom sections of the market. This is most clear in the capital. At the upper reaches of the London market there is plenty of stock, but generally at lower rents, there is a massive stock shortage – as tenancy lengths have increased taking out the churn in the market and reducing choice.”
Yields and Returns
The gross rental yield on a typical rental property in England and Wales stands at 5.0% as of March 2015, stable compared to February this year, though down by 0.1 percentage points since March 2014, when this stood at 5.1% per annum.
Taking into account a slight pick-up in property price growth and improving void periods between tenants (but before costs such as mortgage repayments or maintenance) total annual returns on an average rental property now stand at 12.2% over the twelve months to February. This compares to 11.4% over the twelve months to February and 10.8% a year ago.
In absolute terms this means the average landlord in England and Wales has seen a return, before deductions such as mortgage payments and maintenance, of £21,078 over the last twelve months. Within this figure rental income makes up £8,259 while the average capital gain amounts to £12,819.
Moreover, if current trends continue, then over the next twelve months the average landlord could see a total return of 14.5%, or £26,861. Of this, rental income is likely to yield £9,216 while capital accumulation would amount to £17,645 if market trends of the last three months continue.
Adrian Gill continues: “Rising rents are supporting steady gross yields, in line with the long-run average of just over five per cent. And rental yields should stay steady in the immediate future, as market rents grow vigorously while property prices rise at a similar rate. However, landlords are also benefiting from steady price rises, as the bonus of capital accumulation adds considerably to total returns
Tenants looking for the lowest possible rents depend on landlords investing in new properties to keep up with growing demand for places to let. Yet if and when those same tenants start looking for a home to buy, they often find themselves in competition with landlords to buy a home. Again – building more homes is the only way around that dilemma. But in the meantime, healthy investment and competition between landlords should help tenants avoid excessive rent rises.”
Tenant Finances Improving
As of March 2015, 7.4% of rent is now in arrears, down from 7.6% in February 2015 and down from 7.8% of all rent late a year ago in March 2014.
Over the longer term this improving trend is even clearer. In May 2010, at the start of the current Parliament, 10.7% of all rent due that month was in arrears, following a record high of 14.7% set only three months previously in February 2010.
Adrian Gill concludes: “While renting is becoming more expensive, it appears this is driven by an improving jobs market – and above all by real progress in people’s wages.
Tenants as a whole are managing to keep on top of rent today better than in previous years. The proportion of rent owed to landlords has halved since its peak at the start of 2010. That said, recovering from the financial crisis has taken half a decade, and it remains to be seen how quickly a better economic picture will make inroads into the remaining cases where tenants are falling behind on rent. But the long-term trend is clear, and it’s going the right way.”
