Are rental yields high compared to UK interest rates?

Are rental yields cheap compared to UK interest rates?

Are rental yields cheap compared to UK interest rates?

Over the last 12 months there has been a significant increase in the cost of property across the UK and many people believe we are headed towards a house price bubble. The economy is making slow progress, household incomes are still under pressure but, despite the fact that the vast majority of austerity measures have also yet to hit home, demand for housing in the UK continues to grow. However, if we take a step back and look of the situation in relation to facts and figures, are UK properties as expensive as many would have you believe?

There are many different aspects to take into consideration which will now cover in order to give you a broad outline of the issue.

Rental yields

When you bear in mind that rental yields across the UK vary from under 3% in the luxury end of the London property market to in excess of 6% in many areas of the UK, these do not look overly attractive on the surface. When you also take into account the fact that inflation recently fell to 2.7% the situation is perhaps a little unsettling under traditional guidelines. However, the markets that we live in today are not traditional and valuations have been impacted accordingly.

Quote from PropertyForum.com : “The subject of a new high-speed rail link (HS2) between the North and South of England is something of a political hot potato at the moment with concerns that property prices are being impacted in some of the more affluent areas of the country.”

The key to this situation is the yield currently available on savings which is minimal to say the least with UK base rates steadfast at 0.5%. In effect, when you take into account inflation, there are very few if any savings account which would allow your money to grow in real terms or even to retain relative value going forward. As a consequence, a yield of in excess of 6% from a rental property in some parts of the UK compares favourably to minimal savings income.

Property prices

If we now put aside the comparison between UK base rates and property rental yields, and look at property prices on the whole, there are also other reasons why they are moving higher. It is becoming more and more evident that rental yields are likely to increase with rents up by 4% on average across the UK in August equating to an 11% year-on-year increase. This means that in real terms rents are rising by in excess of 8% at the moment. This cannot continue we hear you cry!

Unfortunately, at this moment in time the UK property sector, and especially the buy to let and private rental markets, are stuck in a very difficult situation. The supply of rental properties remains relatively flat across the UK but demand continues to rise in many areas of the country. This means that there is more competition for individual rental properties which pushes the rents which landlords can charge to traditionally “expensive” levels.

Conclusion

Many people forget that we are in a very unique situation with regards to the UK economy, and indeed the worldwide economy, and traditional financial yardsticks have gone out of the window. Rental yields of 4% plus are readily available in many areas of the UK which compares favourably to UK savings rates especially after taking into account inflation. When you also appreciate the ever-growing demand for rental properties, despite the flat supply of rental accommodation available, this is a potential recipe for a house price squeeze.

When will property investors decide that enough is enough and house prices have become disconnected from the underlying economy?


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