Tenant demand has slowed as buyers get onto the housing ladder to avoid paying higher rents, according to a recent Lettings Survey carried out by the Royal Institution of Chartered Surveyors (RICS) covering the first quarter of 2007. Rents are expected to accelerate as landlords seek to match higher mortgage repayments.
16% more Chartered Surveyors reported a rise than a fall in tenant lettings, down from 28% in October 2006. This is the biggest drop in tenant demand since Q1 2005 and below the long run average of 18%.
Demand was lower for both flats and houses, although the slowdown was greater in the housing sector. For houses, 15% more Chartered Surveyors reported a rise than a fall - down from 34% in January.
New landlord instructions (an indicator of buy-to-let activity) fell slightly in the quarter to April. 7% more Chartered Surveyors reported a rise in landlord instructions compared to 10% 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%, the highest level in two years. 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% more Chartered Surveyors in the Midlands reported a rise than a fall in rents, which is only 1% 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, 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."
