Rents Fall As Houses Fail To Sell

Rents are copying house prices and falling, thanks to an oversupply of unsold homes.

It's good news for tenants and bad news for landlords: according to the latest survey from the Royal Institution of Chartered Surveyors (RICS), residential rents fell dramatically in the third quarter of this year.

The record fall comes thanks to the lettings market being "flooded" by unsold properties being put up to let. Of course, this is basic economics: when supply is high but demand is weak, prices go but one way -- downwards.

A flooded market

The proportion of surveyors reporting new lettings of flats and homes is at an all-time high. Indeed, 50% more surveyors reported a rise than a fall in new instructions to let flats. For houses, this figure stands at 68%, which suggests that thousands of unsold family homes are finding their way onto the rental market. This trend could hurt existing landlords, as reluctant amateur landlords undercut professionals and long-term investors.

Rents go down

Between April and June this year, RICS reported that 31% more surveyors reported rises rather than falls in rents. However, this figure plunged in the following quarter to minus 12%, which is the lowest figure ever recorded by RICS.

In effect, this means that far more surveyors reported falling rents than rises. And if homeowners continue to hang on to their properties and let out them out instead of selling them - in a bid to ride out the housing downturn - then this figure is likely to worsen.

In London, the net balance* of surveyors reporting rises or falls in rents decreased from a stable 0% in Q2 to minus 53% in Q3. For London flats, the net balance fell from 5% to minus 33%. Worst hit was the Southeast, with the net balance for houses plummeting from 53% to minus 33%. Ouch!

This news tallies with my own personal experience. Recently, I made an offer to rent a property in a city in the Southeast. The previous tenants had lived there for two years, paying £1,800 a month. I offered the landlord £1,650 a month, which he promptly accepted -- saving me £1,800 a year.

And I'm not alone. My Foolish colleague Laura Starkey also recently managed to save £60 a week in rent on her London flat. Find out how here.

What next?

With the number of housing transactions at its lowest level since records began, a glut of unsold properties is taking its toll on market rents, leaving tenants firmly in the driving seat. Furthermore, with both rents and house prices tumbling, there seems to be no escape for sellers who have been caught out by the property market. They either take a haircut by slashing their sale price, or try to let out their property in a weak lettings market, risking long voids (empty periods).

Then again, the lettings sector boomed earlier in 2008, providing some relief to estate agents starved of sales. Indeed, many landlords have been able to increase rents and boost their yields (the income from their properties). RICS reported that 27% more surveyors reported a rise than a fall in rental demand between July and September. However, this figure is lower than the 36% reported in the previous quarter, so demand has begun to slacken.

RICS reports some mixed news for solid, well-established landlords: it predicts that property prices will continue to fall during 2009. This will allow professionals to buy rental properties at lower prices, thus increasing their yields -- although their existing properties will be worth less.

Elsewhere in the property market, Rightmove reported a 2.9% drop in asking prices for residential sales in its November House Price Index. This leaves the average asking price at Rightmove down 7.1% in the past twelve months. However, some estate agents are reporting sales going through at a fifth (20%) below peak asking prices, suggesting most sellers are still not being realistic when setting prices.

In addition, Rightmove warned that the number of new sellers entering the market each week has dropped from 35,000 a year ago to just 20,000 today -- its lowest figure since 2002. Another property firm, Hometrack, claims that a typical property now takes almost twelve weeks to sell, and even then only manages to sell at a 10% discount to the asking price.

All this suggests to me that it will be a long time before the housing market starts to function smoothly once more...

* The net balance means the difference between those reporting a rise and those reporting a fall. For example, if 20% of surveyors report a rise and 60% report a fall then the net balance is minus 40%.

Disclosure: Fearing a market crash, Cliff sold his home in April 2005 and has been renting ever since. He has no plans to buy a property before 2010/11.

More: Try our magnificent mortgage service | First-Time Buyers Should Wait | Property Prices Look Set For Further Falls