The latest analysis by Home.co.uk has forecast that downward spiraling house prices in London could finally settle within two years due to improving rental yields.
Doug Shephard, Director at Home.co.uk, said: “During London's recent property boom, house prices soared ahead of rents. Investment fever drove prices up more than 50% in just five years. Meanwhile, rents rose only 10% over the same time period, causing yields to collapse."
Rental yields fundamentally underpin home prices and, following a long period of decline, the tide has turned. Sliding house prices combined with rapidly rising rents is driving yields back up in the capital region.
Prices have fallen by around 2.3% over the last year while rents have jumped by 4.3%. Moreover, rent hikes are accelerating due to a scarcity of rental accommodation. Overall, the number of available properties to rent in Greater London has dropped some 14% but, if we filter out the 'unletable properties' that have been hanging around for more than 20 weeks, the drop is more like 27%.
Low yields, sliding capital values, higher taxation and regulation have all served to disincentivise investors from buying more properties. In fact, this combination of factors has been encouraging many landlords to leave the rental market altogether, hence the drop in available properties to let, caused by a steep fall in supply of 21% over the last 12 months.
For the time being, the typical gross yield in London of 3.7% remains too low to be attractive and yields in Prime Central London locations are even worse, making buying a home to rent far more lucrative in other UK regions.
Across England and Wales, the average yield in August is 4.7% while in Leeds, for example, the typical yield is a far more attractive 6.0%.
Looking at the counter trends of sliding prices and surging rents in London, Home.co.uk estimates that rental yields could reach as high as 6% by the end of 2020: sufficiently attractive returns to trigger significant reinvestment and thereby stabilise property prices.
Doug Shephard posed the question: “How long will London prices keep falling? This is a key question for the UK market as a whole, as history tells us that what happens first in London happens later to the rest of the regions.
The answer may be quite simple: when rental yields return to attractive levels. For that to happen, either prices must come down or rents must rise or both. In fact, the current trends show both processes are occurring already, but slowly.”
He added: “We expect some significant rent hikes over the next two years as tenants compete to secure a home in the capital, and this will accelerate the rise in yields.
Sufficient yield recovery will prompt landlords to invest once more in London's vital Private Rented Sector although, should rent controls be imposed, they will almost certainly stay away.”