Rental Market Bounces Back

Times are tough for buyers and sellers, but landlords appear to be thriving.

The housing market is collapsing. OK, perhaps that's a rather sensational statement, but nevertheless, I think there's more than a grain of truth in it.

Buyers are finding it increasingly difficult to finance property purchases or are holding back for fear of buying in a falling market. Meanwhile sellers are struggling to achieve their asking prices.

Indeed, according to figures from Hometrack's National Housing Survey last month, sales are going through at just 93% of the asking price on average. And property sales are taking around 50% longer to complete than they were 12 months ago.  

So -- with demand falling from new buyers -- is there any positive news to be had out of the current housing market conditions?

Well, yes.... if you're a landlord. A raft of new instructions to let property took place throughout the first quarter of 2008, according to figures from the latest Royal Institution of Chartered Surveyors (RICS) Residential Lettings Survey. This is a dramatic upturn from the position over the previous quarter.

RICS data shows that the net balance of surveyors reporting a rise in instructions to let property increased to 29% over the first quarter of the year. This compares with -2% in the previous quarter, which was the first time in the survey's history that instructions to let property declined.

RICS explain this remarkable turnaround has occurred as a growing number of would-be sellers are now flocking to the rental market, having experienced difficulty in selling their homes.

A Changing Climate

But how quickly things change. Less than a month ago my Foolish friend, Laura Starkey questioned whether the buy-to-let bubble was about to burst, after figures from the Council of Mortgage Lenders showed significant rises in the number of buy-to-let borrowers falling into mortgage arrears or facing repossession.

No wonder that lending criteria has recently become stricter for buy-to-let mortgages and remortgages.

These days, those wanting to get into the buy-to-let game are expected to put down a hefty deposit. As David Kuo discovered in our recent podcast on the buy-to-let market, at least a 15% equity stake is now required to secure a decent buy-to-let mortgage deal.

Worse still, lenders are now demanding that rental income covers 125% of mortgage repayments, whereas previously just 100% or 110% cover would suffice.

But despite these challenges, residential lettings appear to be going through a particularly robust period nevertheless.

Demand from tenants has become even stronger during the first quarter of the year, as many potential buyers have been forced to bow out of the sales market for now.

And the figures appear to bear that out, with 28% more surveyors reporting a rise in new tenant lettings than a fall, up from 17% in the last quarter. 

This would make sense if some homeowners are choosing to rent out their homes, rather than accept that they may have to lower their asking prices.

Rental yields are enjoying something of a purple patch too. The net balance of surveyors reporting an increase in gross yields is at the highest level since the survey began. Indeed, 23% more surveyors saw a rise in gross yields, up from 5% in the previous quarter.

And the prospects for yields continue to look good, as surveyors claim that rents are still climbing.

That said, it's tricky to tell just how long the current rental boom will last or even if it is a boom at all - it is only one month's statistics from RICS, after all.

Of course, one day the wheels of the housing market will start turning again, when the effects of the credit crunch finally begin to diminish.

But until that time, it would seem as the property sales slow down, the lettings market is picking up. As the saying goes: One man's meat is another man's poison....

More: How To Rent Out Your Home | Buy-To-Let Investors: Should You Panic?