Rising London rent yields could stabilise house prices

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House prices in London are expected to “bottom out� in around 2 years’ time – by the end of 2020.

According to figures generated by houses sales and renting website Home.co.uk, rental yields fundamentally underpin home prices in the capital. Because of this CEO Doug Shephard thinks that after a long period of declining rents, combined with falling prices, rental yields are on the rise again.

Home.co.uk claims it uses search engine technology to build and maintain the most comprehensive database of UK residential properties advertised for sale and rent on the Internet.

During the boom times in London’s property market, house prices soared ahead of rents, says Shepherd. There was an “investment fever� which drove prices up more than 50% in just five years. Meanwhile, rents rose by only 10% over the same time period, causing yields to collapse, Shepherd explains.

His report says that prices fell by around 2.3% over the last year, while rents have increased by 4.3%, and a lack of supply means that rents are on the increase again for suitable rental accommodation.

Shepherd claims that lower capital values, higher landlord taxation and more regulations have all served to disincentives investors from buying more properties in London. Plus all this has encouraged many landlords to leave the rental market altogether, hence a drop in the supply of rentals. It now results in a steep fall in supply of 21% over the last 12 months.

Currently the typical gross rental yields in London is around 3.7%, too low to be attractive for buy-to-let investors, and in prime central London locations yields are even worse, shifting investment outside of London.

At the same time, the average yield across England and Wales in August was about 4.7%, while some Northern cities can top 6%.

With counter trends of sliding prices and rising London rents, Shephard estimates that London rental yields could reach as high as 6% by the end of 2020. This he thinks would result in a resurgence of investment, which would have the effect of stabilising property prices.

“We expect some significant rent hikes over the next two years as tenants compete to secure a home in the capital, and this will accelerate the rise in yields.

“Sufficient yield recovery will prompt landlords to invest once more in London’s vital Private Rented Sector although, should rent controls be imposed, they will almost certainly stay away.�

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