Rental yields fell 0.8% to 5.4% in the third quarter compared to a year ago, according to Fleet Mortgages, with landlords expected “to bide their time when making future investment decisions.”
The North East of England retains its top regional rental yield figure across England & Wales for the ninth quarter in a row, falling 0.8% over the year to the third quarter to 7.2%, says the specialist lender’s latest buy-to-let Rental Barometer.
Wales moved into second place, rising 0.2% to 6.2%. Yorkshire and Humberside, slipping 0.6%, and the North West, falling 1.2%, both remained in joint third with rental yields of 6.5%.
However, the study points out that the overall drop from the second quarter to the third quarter to the end of September, is just 0.1% when yields were 5.5%.
It adds in the second quarter of the year, rental yields across all regions were down, with every region posting a fall of between 0.1% and 0.9%. But in the third quarter, two regions – Wales and the South West – registered annual increases, up 0.2% and 0.3%, respectively.
The index points out that on a quarter-on-quarter comparison, Greater London also saw an increase in rental yields – up 0.2% to 4.6% – while the South East was unmoved at 5%.
It says that, “those regions which had seen a quarterly increase in rental yield were doing so because of an acute shortage of rental accommodation, particularly in Greater London”.
Adding, “that the recent increase in the cost of mortgage finance might see further landlords exiting the private rental sector which was likely to exacerbate the shortage of property in those regions”.
The study anticipates that, “mortgage interest rates will remain high due to volatile two and five-year swap rates, with lenders having no choice but to increase product rates to match the increase in funding costs”.
Fleet’s report adds that, “the increased cost of BTL mortgages – specifically as a result of the recent market turmoil – was bound to impact on rental yields, as landlords were unlikely to be able to recoup all of these greater finance costs via an increase in rents.”
Inflation surged to 10.1% in September from 9.9% the month before, says the Office for National Statistics today, pushed by higher food, transport and energy costs – increasing living costs for renters and other consumers.
The Fleet survey says that as a result of increased interest rates, it anticipates that the demand for residential property will fall, and expects landlords “to bide their time when making future investment decisions, even with tenant demand far outstripping supply and there being a real need for more private rental sector property”.
The report comes after new Chancellor Jeremy Hunt this week reversed the vast majority of tax cuts announced in September’s mini-budget, although the stamp duty cut for house purchases remains.
Last month’s tax statement led to more than a thousand products being pulled as lenders worked out how to reprice loans as the cost of debt for the government and companies lifted on international money markets, following former Chancellor Kwasi Kwarteng’s tax-cutting fiscal event.
Fleet Mortgages chief commercial officer Steve Cox says: “These new set of rental yield figures have to be viewed in the context of the period they cover – July through September – and what has happened to the mortgage market since then.
“We now have to take into account a very different interest rate environment, the pulling of many buy-to-let products following the mini-budget, and lenders having to make difficult decisions around product ranges and pricing.
“To that end, it’s an obvious point to make that the cost of buy-to-let mortgages has increased, and landlords will need to factor that into their profitability and what they might charge for rent in order to cover these increased costs. This is not an easy task given the cost-of-living crisis and there is a need to marry up the need of the landlord to cover the mortgage, with the struggles being faced by many tenants.
“This, at least in the short-term, is likely to have something of a dampening effect in terms of purchase activity.
“Even though many portfolio and professional landlords do want to add to portfolios, and add to the supply available to tenants, the cost of funding those purchases has increased significantly, as it has done for those existing borrowers who are now coming off special rates and require a remortgage or product transfer.
“Our outlook is that rates will remain high for the short-term although it is our hope that recent attempts to calm the markets will provide greater certainty to lenders who will be able to return products to market, particularly in areas such as two-year fixed rates which have, by necessity, seen a considerable fall in number.”
Cox adds: “Tenant demand is not going to drop and supply is needed in considerable numbers – if landlord borrowers and their advisers can square the finance circle, and we can see a greater degree of competition coming back to the BTL mortgage market and more competitive rates, then it is likely that activity will improve and landlords will continue to secure strong yields.”
