Market Insight - October / November 2018
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New Lets versus Renewals

New Lets versus Renewals

Rental growth on new lets is slowing, despite low stock levels, but rents on renewals remain robust.

Rental growth across Great Britain has slowed this year, despite there being fewer homes available to rent on the market. The 3% stamp duty surcharge on second home purchases combined with the tapering of mortgage interest tax relief has reduced the number of homes available to rent. So far this year, there were 6% fewer homes available to rent in Great Britain than the same period last year. However, in London stock levels were down 21%.

In fact, since April 2016 landlords have sold over 110,000 more homes than they’ve bought, with over 21,000 of those sold in London. But despite low stock levels, rental growth is still sluggish, so what’s happening?

The average rent on a newly let property (i.e. a home advertised on the open market to let) stands at 1.0% in Great Britain. But in London, rents have fallen for the last three consecutive months, down -0.8% year-on-year in August. London remains the only region in the country where rents are falling, despite it being the worst affected region from the stamp duty surcharge because of its expensive property prices. Outside of the capital rents on new lets are still rising at 2.0%.

It seems that uncertainty, affordability and the effects of various tax changes are hitting the rental market too. This has resulted in a rise in the number of tenancies renewing. So far this year there were 2.5% more renewed tenancies than last year and this has meant that rental growth on renewed tenancies has risen 2.8%, the highest level in 10 months. This is particularly true in London. 

Renewal rents in London have risen for the last three months, reaching 3.2% year-on-year in August, despite rents on new lets in the capital falling. In fact, London has seen the second strongest renewals rental growth across the country. 

Moving is costly for both tenants and landlords. In a period of uncertainty, with tenants’ incomes and landlords’ yields squeezed, more tenancies are being renewed instead. With affordability stretched and less choice available on the open-market, more tenants are choosing to stay put. And with landlord yields under pressure from high property prices and tax changes, fewer landlords want to run the risk of looking for a new tenant and suffering void periods. 

Looking ahead, the shortage in lettings stock is unlikely to change anytime soon. August was the worst month on record for landlord purchases, with only 9.9% of homes being bought by an investor. But low stock levels, should support rental growth on new let properties in the future as incomes begin to pick up. 

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