Rental demand slows as home sales bounce back

Tenant demand has faltered while sales increased in response to a reduction in employment growth and rising rents according to the latest RICS Lettings Survey.

16 percent more Chartered Surveyors reported a rise than a fall in tenant lettings, down from 28 percent in October 2006. This is the biggest drop in tenant demand since Q1 2005 and below the long run average of 18 percent as house buyers returned to the market to avoid rising borrowing costs. Demand also fell for both flats and houses, although the slowdown was greater in the housing sector. For houses, 15 percent more Chartered Surveyors reported a rise than a fall - down from 34 percent in January.

New landlord instructions (an indicator of buy-to-let activity) fell slightly in the quarter to April. Seven percent more Chartered Surveyors reported a rise in landlord instructions compared to 10 percent in the previous quarter. The fall in activity has been driven by a continued reduction in yields and signs that underlying house price growth is beginning to slow. The percentage of landlords selling their properties jumped more than a percentage point to 5.2 percent, the highest level in two years. Many landlords are selling into a tight housing market in light of falling gross yields and rising borrowing costs.

Gross yields fell for the third consecutive quarter, with the pace of decline accelerating at its fastest rate since July 2004. The sharp fall in yields reflects strong house price inflation coupled with slowing rental growth. Surveyors report that rental levels increased at their quickest pace since July 2006, although the figure was skewed by unusually large rental increases in the Midlands. 29 percent more Chartered Surveyors reported a rise than a fall in rents which is only one percent below the survey’s record high. Further growth, reinforced by further interest rate increases and muted growth in landlord instructions is expected by respondents.

RICS spokesperson Jeremy Leaf commented: “Housebuyers are returning to the market to avoid rising borrowing costs, signalling a drop in demand for rental property. With more supply on the market due to a rush to avoid the upfront costs of HIPS, which now seems a little premature, buyers have found the market less tight than expected.

“Rising borrowing costs and a subsequent drop in yields have also contributed to a worrying time for landlords. Interest rate rises later in the year will have a further dampening effect, but the underlying strength of the economy and an active housing market should ensure a soft landing for many.”