Blip or bust: the end of the rental boom?

As rents dip and some buy-to-let mortgage rates increase, Robert Powell asks if the good times are over for landlords.

A mixture of stress and desperation is palpable in the voices of most of people who call. It’s been barely twelve hours since I posted an online advert for my soon to be empty room in central London, and my phone has not stopped buzzing with texts, calls and emails from flat hunters.

This huge demand for my small abode in an ex-council block in the Hoxton area of London clashed somewhat with the property topic I had been researching all day. Rents are now down 1.6% on their October 2011 peak and have dipped in all but three of the four months to March. Alongside this, some buy-to-let mortgage lenders are now beginning to up rates.

These two facts have led some to surmise that the seemingly unshakable rental sector was beginning to wobble.

Soaring demand

The buy-to-let sector has boomed over the last few years thanks to soaring demand and competitive mortgage rates. The stagnant residential mortgage market has fuelled this boom. Put simply, there are currently just too many hurdles for first time buyers to clear in the race to purchase a property.

Even if home hunters can scrape together a deposit in the current tight financial climate, there’s still no guarantee of getting a mortgage. As a result, transaction levels have been sat at around half the level they were six to seven years ago.

This has left renting as the only viable solution for many. But this surge in demand for lettings – along with high levels of inflation – has caused rates to rapidly swell. This increase has been most pronounced in London, where the average rent is now a huge £1,028 – 5.6% higher than it was just 12 months ago.

Figures made available to lovemoney.com looking at regional demand for rented rooms confirm that London remains something of a bubble within the lettings market. The research, that uses average page views on the rental website Spareroom.co.uk, shows that the top seven areas for demand are located within the capital, followed by commuter towns such as Slough, Guildford and St. Albans. Predictably, these regions also have the highest rental rates. There are only three areas outside of south east England that make it into the top 15: Aberdeen, Cambridge and Oxford.

At the other end of the spectrum, room adverts in the Scottish towns of Galashiels and Dumfries get the fewest page views on average, followed by Swansea and Motherwell.

The Spareroom.co.uk stats also explain the huge demand for my room, as the region emerging top of the list – east central London – is also the location of my current flat. Room adverts in this area get viewed around 150 times every day. The most popular ad in the last month received a massive 677 clicks in the space of just 24 hours.

London bubble

So if demand is still high, what explains the recent dip in rents? Well, when it comes to housing, London should never be held as indicative of the wider national situation.

Matt Hutchinson, communications director at Spareroom.co.uk says London is definitely a bubble when it comes to housing with around half of the traffic on the site coming from the capital and south east England commuter region.

“There are always more people who need to live where the jobs are. There is plenty of affordable housing still around, but having affordable housing where there are jobs is the problem,” he says.

The Stamp Duty holiday has also played a part in the slight rent dip. The temporary tax break, which expired late last month, triggered an increase in first-time buyers. This in turn took more people out of the rental sector, easing demand and bringing down rents in February.

A blip, not a bust

The real impact of the Stamp Duty holiday on the lettings market will be revealed when April’s rent figures are released. But chances are – as the holiday is a one-off tax break – rates will rise again.

Ben Thompson, Managing Director of Legal & General Mortgage Club, sees the drop in rental rates as a temporary blip and says demand will probably stay strong for the rest of the year owing to a lack of confidence in employment and restrictions on mortgage finance.

As for recent increases in buy-to-let mortgage rates from major lenders such as Santander and Leeds Building Society, Mr Thompson cites the current Europe-wide crisis as a key reason.

“Funding has become much harder so mortgage rates have become more expensive relative to perhaps where they were nine months ago. What that forces me to do if I’m a landlord is to say ‘can pass it onto my tenant’, in terms of increased rent,” he says.

Rising property prices

So what does the future hold? Well, if new research from rightmove is to be believed, the situation in the residential sector is not getting any easier for first time buyers. The figures show that the average property asking price in England and Wales has now climbed to a record high of £243,737. This in turn pushes up the level of deposit needed to purchase, raising the homeowning hurdle even higher and diverting more people to the rental sector.

Predictably, London has seen the biggest increase with prices shooting up by 14.9% in the four years since the previous peak.

It seems for the capital’s population, renting – or indeed buying – a home, is set to stay stressful for a good time yet.

More on property and mortgages:

Property asking prices hit record high - in the south

The top 10 fixed rate mortgages

The hidden cost of buying a new build

New Government planning policy does not go far enough

Will borrowers with rented solar panels have trouble remortgaging?