Rising prices fuel housing rentals

DEMAND for rented accommodation is booming as would-be first-time buyers find themselves priced out of the housing market. Many young people have put their dream of home ownership on hold following annual house price rises of more than 25%.

As a result, the Royal Institution of Chartered Surveyors said, demand for flats and houses to rent reached its strongest level so far this year in the three months to the end of October. Spokesman Jeremy Leaf said: 'Many people who would otherwise prefer to buy are now looking to rent - particularly in London and the South-East, where they have been deterred by the chase to find a home from the dwindling number available at an affordable price.'

While the extra demand might be expected to drive up rents, it has in fact been outpaced by the glut of property coming on to the rental market. The RICS said 18% of its members reported an increase in rental business, compared to 16% in July and 12% in January.

Its figures showed new instructions from private landlords accounted for 89% of all new properties available during the last quarter, suggesting buy-to-let investors are still dominating the market.

The slump in the stock market and the prospect of lower income from pensions has prompted many to try to generate income for their old age by buying a second property to rent out. Such is the competition among private landlords to attract reliable tenants, however, that they are being forced to cut rents, which are not likely to pick up before the end of the year.

The national average monthly rent for a one-bedroom flat has fallen from around £533 a month to £519 since the summer. This figure hides huge variations, ranging from £373 in Wales to £2,336 in Inner London, where rental returns have been falling for nine months. For larger properties, average rents nationally held steady at around £656 for a two-bedroom flat and £859 for a three-bed semi. Surveyors in some regions reported modest rises in average rents.

The RICS said it was becoming increasingly difficult for landlords to make a profit, with a growing gulf between purchase prices and rental returns. Rents fell for the third month in a row, although the pace of decline eased slightly, with 6% more surveyors reporting a drop, compared with 10% in the previous quarter.

'The large amount of property which has come on to the market over the past year is expected to continue to hold back rents,' the RICS said. 'Rents are expected to fall in the South-West as well as London and the South-East in the next quarter. In all other regions, they are expected to be static or show modest increases. Yields will move lower again in the next three months given that property prices are expected to continue to rise, while rents are expected to fall.'

The housing boom appears to be slowing with property prices increasing by just 0.2% nationwide this month. Property website Hometrack predicts prices will rise 4% in England and Wales as a whole next year while falling 5% in London.