Tenant demand has faltered while sales increased in response to a reduction in employment growth and rising rents according to the RICS Lettings Survey published today (Wednesday 30 May 2007).
Overall tenant demand for residential property in the quarter to April 2007 increased at the slowest pace since Q1 2005. Many recent homebuyers moved in to their new properties during Q1 and therefore no longer needed to rent, following the peak in mortgage approvals in Q4 2006. The marked slowdown in employment growth that took place during the first quarter has also dampened tenant demand for residential property, as have the increases in rents that have continued into the first quarter of 2007.
Growth in new landlord instructions, an indicator of buy to let activity, moderated slightly as a result of continued falls in yields and signs that underlying house price growth is beginning to slow. The rise in new instructions in the quarter to April marks the fourth consecutive, below average increase, which suggests that activity is far calmer at the moment than during the 2001-2004 boom period.
Surveyors reported that rental levels increased at their fastest pace since July 2006, although this headline national figure appears to have been skewed by unusually large rental increases in the Midlands. Across all other regions, apart from the South West, rental increases moderated in line with the general trend that has been underway since the second half of 2006.
Looking ahead to the next quarter, surveyors' outlook for rental growth picked up sharply, with expectations just slightly below the survey's all time high. Sustained increases in interest rates since last August and muted growth in new landlord instructions are expected to lead to firmer rental growth.
Residential gross yields fell for the third consecutive quarter, with the pace of decline rising at the fastest pace since July 2004. While the pace of yield decline accelerated for flats, it moderated slightly in the housing sector. Sharply falling gross yields reflect strong house price inflation coupled with generally slowing rental growth.
RICS spokesperson Jeremy Leaf commented, "Housebuyers are returning to the market to avoid rising borrowing costs, 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."