The substantial shift towards private renting is increasing the importance of rental growth across the housing market. While house prices continue to flatline in the mainstream market, rental growth continues apace.

The LSL Property Services Group reports that in June rental inflation had reached 4.4% across the UK and 6.9% in London.

Increased demands on the private rented sector, from new and existing households, reflect the changing nature of the housing cycle. The big question is, who will supply the stock to meet this demand?

Figures from the Council of Mortgage Lenders (CML) show that the increase in the number of buy-to-let (BTL) mortgages is failing to keep pace with the demand for rented accommodation. Whereas the Survey of English Housing reports an increase of 286,000 in the number of private rented households between 2008/09 and 2009/10, the CML figures show the number of new mortgages increased by just 71,400 for the same period.

Buy-to-let market

More recently, in the 12 months to March this year 108,000 new BTL mortgages were granted, but taking into account factors including re-mortgaging this only translated into 75,200 additional mortgages, down from a peak of 190,000 in 2007. This partly reflects the fact that the BTL buyer now has to work to a maximum 75% Loan to Value mortgage, compared to 85% in 2007. Combined with low house price growth this is restricting the ability to expand a portfolio.

As accidental landlords eventually leave the sector, there is an opportunity for equity rich investors. Whether these are individuals or institutions, rental growth will be critical to delivering the competitive income yields they require.

Taken from:
Residential Property Focus, Q3 2011