Has the UK Buy to Let Bubble Finally Burst?

The latest Rental Index from HomeLet shows that average UK rents have fallen for the first time in more than seven years, with London seeing the biggest decline.

The slowdown in the rental sector mirrors a similar picture in the housing market, with figures showing that property prices have fallen for the third month in a row.

The average monthly rent on a new tenancy that started in May was £901 was down 0.3% on the 2016 figure of £904 and, representing the first decline since December 2009.

London Rents Record Biggest Declines

Typical new rents in London have fallen by 3% in the last 12 months and the capital has seen average rents fall from £1,572 a month in July 2016 to £1,502 in May of this year. That means new tenants in London are typically paying £70 a month less than their counterparts last summer.

Four other regions of the UK saw rents on new tenancies fall during May. The north-east of England, the south-east, Scotland, and Yorkshire and Humberside experienced falls ranging from 2.3% to 0.6%.

Martin Totty, HomeLet’s chief executive, said its figures suggested that landlords “are now facing a difficult balancing act between ensuring rents are affordable for tenants in a low real wage growth environment while covering their own rising costs”.

More than 4.3m Households Rent Privately in the UK

In April, the lettings agency Your Move said London had seen a sharp fall in rents over the previous 12 months, reflecting the fact that many people looking for rental properties had switched their focus away from the capital.

Some commentators have suggested that tenant demand has been falling, particularly in London, possibly as a result of Brexit, while others have said a weaker sales market had prompted some homeowners to let out their homes rather than putting them up for sale.

On 1 June, Nationwide said house prices had fallen for the third month in a row, for the first time since the height of the financial crisis in 2009. Its monthly house price index showed that the average price of a home fell by 0.2% between April and May, to £208,711.

More a Market Correction than a Bursting Bubble

In many senses, declining rents and property prices in the UK is good news for savvy investors as it improves the fundamentals for long term sustainability. Recent years has seen huge investor activity in buy-to-let markets that effectively created a sellers’ market with spiraling rents, as landlords attempted to improve margins in a landscape of exponentially rising property prices, particularly in London.

The rental market in London has been biased towards large, luxury developments with huge price tags, while demand at the affordable end in the capital has remained unsatisfied. The declines recorded in both property prices and rents are a clear indication that the market is correcting in favour of affordability.