Rental market not working everywhere

Robyn Hall

December 12, 2012

By segmenting the market into active, inactive and mature markets, Hometrack has been able to identify areas of the country where rental demand and rents are at their strongest and at their weakest. Put simply Hometrack’s analysis shows that the private rental sector does not work everywhere.

The private rented sector has grown at a staggering rate. In the last five years it has increased faster (in absolute terms) than at any point over the past two decades. It is not surprising therefore that the sector has generated interest from investors. While buy-to-let numbers have fallen from the height of 2007 (when they represented 11% of all transactions), lending to the sector has been steadily growing (according to CML figures, Q3 2012 saw a rise in buy-to-let lending of 8% on the preceding three months).

David Catt, chief operating officer at Hometrack, said: “The risk that lenders take is in balancing the loan against the fundamentals of the rental market both geographically and by price. Our analysis shows that there is little point in investing in the private rental sector in locations where a viable rental market simply doesn’t exist.”

Hometrack’s classification of the private rental market shows that mature markets – those with high concentrations of rental supply and strong turnover are to be found in just 7% of the country and account for 29% of the UK’s rental stock. These tend to be large urban areas – often university towns – where rental demand is at its greatest.

In contrast, inactive markets account for 71% and contain 38% of the UK’s private rental housing stock. Inactive markets are defined by areas where rental demand is at its lowest and landlords run the risk of long periods of voids.

London stands alone as the city with the greatest concentration of rental properties. It has the largest pool of demand and as a consequence commands some of the highest rents in the country. The average rent for a two bedroom home in the capital is three times higher than elsewhere in the UK.

Similarly over 50% of market rented homes in the capital are fully occupied.

Catt said: “The luxury of a spare room is a thing of the past for many London tenants.”

He added that to put this into context, a fifth of owner-occupied homes in London are fully occupied. Across the rest of the country occupancy levels for private rented homes are three times higher than for owner-occupied properties.

In some areas of the country the cost of renting is higher than buying. Away from London tenants unable to raise a deposit to buy, are paying a monthly premium of between 5-10% over the cost of purchasing a home. In markets with high capital values, renting is still cheaper than buying.

Catt said: “There is little doubt that affordability constraints will continue, at least in the medium term, to act as a barrier to owner-occupation. The private rental market will, as a consequence, continue to grow. However, investors and lenders alike need to be aware of the bigger picture and understand that the rental market far from being uniform, differs greatly across the country.”

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