Ups and downs

Posted by: Jules Birch

31/08/2010

Rising rents are going hand in hand with falling prices as the housing market adjusts to shifts in supply and demand.

Two surveys over the last few days show the impact on tenants and landlords as well as home buyers and sellers. 

On Friday, in its latest residential lettings survey, the Royal Institution of Chartered Surveyors (RICS) said increased tenant demand and a shortage of properties were pushing rents higher. 

Demand increased in all regions but was strongest in London and the East of England. The RICS said demand stemmed from problems in getting a mortgage, worries over double dip price falls and the large deposits being required by lenders. At the same time, landlords looking to cash in were having difficulties getting a buy-to-let mortgage.

It’s an illustration of how interdependent the rental and sales market have become in the wake of the buy-to-let boom and the increase in the size of the private rented sector. But the shortage of social housing is also having an impact: 11% of demand for private lets now comes from social tenants, almost double the level two years ago.

With few signs of an improvement in the mortgage market any time soon - and suggestions over the weekend that the Bank of England may impose new restrictions - the impact is being felt in the sales market too.

In its latest survey published this morning Hometrack hardens its view of what happening and concludes that a re-pricing of housing is now underway. The annual rate of house price inflation remains positive at 1.5% but almost all of Hometrack’s indicators are pointing to a deterioration and the monthly fall in August was the biggest for 16 months.

The proportion of postcodes reporting price falls surged from 12% in July to 30% in August while only 3% of postcodes reported an increase. The sales price as a percentage of asking price and the number of new buyers registering both fell for the second month in a row.  Homes are taking longer to sell.

In the meantime, the supply of homes for sale grew by 2.4% in August - well above average for what is traditionally a quiet month.

Hometrack director of research Richard Donnell says that ‘modest re-pricing’ is likely to continue for the next six to 12 months. The recovery in prices over the last 18 months and the abolition of home information packs had led to a surge in new properties coming on to the market at the same time as growing weakness on the demand side. 

At some stage those supply and demand factors will shift again. Some tenants who can get a mortgage but are choosing to rent at the moment may see falling prices as a chance to buy. Homeowners may decide to rent out their property rather than accept a lower price.

Ahead of the spending review though the signs are not looking good for the government’s revenue from stamp duty on house sales or its spending on housing benefit to cover rising rents.