Property prices and rental yields

[Gatesy]

Hi all,

 

Can anyone point me in the direction of a decent thread / string within thread which has discussed the relationship between property prices and rental yields? i wanted to brush up with particular thoughts on UK property

 

Thanks

[drbubb]

There's a thread on Rental data - but no reason we cannot have a thread of its own for this relationship

 

What's your thinking?

[drbubb]

I found this chart - it is based upon an interesting way to derive the data

 

 

UK house prices 6% overvalued, down from peak 30%, based on rents

Posted on Tuesday, August 3, 2010 at 09:48AM by Simon Ward | Post a Comment

UK house prices are 6% overvalued, based on a comparison of the national rental yield with its historical average.

 

The national rental yield is derived from national accounts data by dividing the sum of actual rental payments and imputed rents of owner-occupiers by the value of the housing stock – see first chart. The yield averaged 3.6% between 1965 and 2007. (The low value partly reflects the inclusion of subsidised social housing and vacant properties.)

 

The house price boom pushed the rental yield below 2.8% in the third quarter of 2007, suggesting that prices were overvalued by 30%, based on the 3.6% long-run average. Current prices are 5% lower, according to the index published by the Department of Communities and Local Government, while national accounts rents have risen by 18%. The resulting 3.4% yield implies overvaluation of 6%.

 

Housing market bears compare house prices with earnings rather than rents. The ratio of the value of the housing stock to household disposable income is 59% above its long-run average – second chart. This average, however, is a misleading guide to "fair value" because the ratio has trended higher over time, reflecting factors such as improving quality, the pressure of an expanding population on constrained supply and a high income elasticity of demand for housing.

 

The national rental yield, by contrast, has fluctuated around a stable long-run level. Rents already incorporate fundamental influences on housing demand and supply. People need to live somewhere – the choice is between buying your own home or renting, not between spending money on housing or retaining income for other purposes.

 

The current 6% overvaluation does not imply that house prices will fall, for two reasons. First, the deviation can be corrected by rising rents – up by 7% in the year to the first quarter. Secondly, a below-average rental yield may be sustainable as long as nominal and real interest rates remain low, limiting forced selling.

 

/source: http://www.moneymovesmarkets.com/journal/2...ed-on-rent.html

[Gatesy]

Thanks for the link and post dr bubb, interesting food for thought.

 

My thinking is prompted by a decision a close relative needs to make between selling to rent or keeping to let. The relative is ill and looking to move into a rented bungalow. This leaves her to decide whether to keep her existing 100%owned small house and rent it out, or sell it and look for an alternative yield. Either way she will need yield to pay for the rented bungalow. So was just trying to think of the best value play.

 

Of course I am quite a gold advocate and one of her potential options at least is to sell up and put a chunk in pm's,which she may well do if I recommended it but it may be tricky to extract a regular 'yield ' from the pm's due to volatility

 

All thoughts welcome. Thanks

[Mabon]

Thanks for the link and post dr bubb, interesting food for thought.

 

My thinking is prompted by a decision a close relative needs to make between selling to rent or keeping to let. The relative is ill and looking to move into a rented bungalow. This leaves her to decide whether to keep her existing 100%owned small house and rent it out, or sell it and look for an alternative yield. Either way she will need yield to pay for the rented bungalow. So was just trying to think of the best value play.

 

Of course I am quite a gold advocate and one of her potential options at least is to sell up and put a chunk in pm's,which she may well do if I recommended it but it may be tricky to extract a regular 'yield ' from the pm's due to volatility

 

All thoughts welcome. Thanks

 

It depends upon the rentability of the house your relative owns.

 

Suss out what the average local rent for her type of property is.

 

Is there a demand for her type of property?

 

How vibrant is the local rental market? Is it easy to re-let?

 

Depending upon the answers, I'd say for her to keep it and let it out (via a reputable agent if she wants to be free of any hassle).

 

In the shorter term, she could recycle the yield - if there is any spare after costs etc - and buy pm's that way.

 

I'd be reluctant to sell the house and allocate the capital majorly into pm's.

 

The house is an asset that can produce a yield. Depending upon what that yield is, then that yield can be recycled.

 

A lesser allocation obviously.

 

Disregard this if you think that we are on the verge of total collapse.

 

Good Luck.

[drbubb]

My thinking is prompted by a decision a close relative needs to make between selling to rent or keeping to let. The relative is ill and looking to move into a rented bungalow. This leaves her to decide whether to keep her existing 100%owned small house and rent it out, or sell it and look for an alternative yield. Either way she will need yield to pay for the rented bungalow. So was just trying to think of the best value play.

 

Today's immediate comparison : Renting versus Owning - may make Renting look more expensive.

 

But here are some hidden possible reasons to sell-and-rent anyway:

 

+ Selling out will allow one to repay any mortgage debt, and remove the exposure to rising rates,

 

+ A renter may benefit if rents fall

 

+ The cash realised by selling may allow one to make investments that are more flexible & higher return (gold?)

 

+ By selling out, one is free from future new property taxes which may be introduced.

 

On top of these, by selling, one will not lose if there is a slide in property prices.

[drbubb]

+ A renter may benefit if rents fall

There is certainly no sign of this yet, as this article makes clear:

 

ADDED 19/10/10

Rising rents reach record high for buy to let landlords

 

Rents have reached an average record high of £689 per month following eight consecutive months of increases.

 

London rents are up by two percent to reach an all-time high and are seen as a driving force behind UK rental inflation in 2010.

 

But unfortunately although tenant arrears fell in September the level of these remains high with 10 percent of all rent in arrears.

 

These figures are the latest findings of the Buy to Let Index from LSL Property Services.

 

It found the average UK rent is now 3.1 percent higher than September last year and that the average yield remained stable at 4.9 percent last month as rising rents were matched by modest house price growth in the past three months.

 

David Brown, Commercial Director of LSL Property Services, said: “Landlords have seen tenant demand continue to hit new heights.

 

“The mortgage market remains tight and many buyers simply cannot get the finance to get a foot on the property ladder.

 

“And with potential spending cuts on the horizon, and uncertainty over the direction of the economy, many buyers are choosing to remain in rented accommodation for longer, perhaps to wait for house prices to fall.”

 

The resurgence in rents has been driven by a strong performance from London and the South East in 2010.

 

In September, London rents hit their highest on record. Landlords increased their rents by two percent to £972 per month in September. They have risen by 6.8 percent since January.

 

Rents in the South East rose by 0.9 percent in September, while those in the East of England and the West Midlands rose by one percent. The South West and North West reported modest falls.

 

Brown added: “Traditionally, London is seen as a low-yield market. But this isn’t the case.

 

“Despite the strong performance of house prices in the capital in the past year, yields haven’t fallen sharply.

 

“With rental properties so sought after in the city, landlords have been able to continually hike rents since January and are seeing a yield just 0.1 percent shy of the UK average.

 

“In the last 12 months, the average London landlord would have made an annual total return of nearly £34,000 on a typical rental property.”

 

/more: http://www.residentiallandlord.co.uk/news2485.html

 

== ==

 

But some think a turn is coming:

I have noticed that the British people tend to be very good at burying their heads in the sand. Many people really believe that the rent prices in London are as a result of demand. I think we are going to have to wait until April to be proven right. Housing benefit was one of the biggest government subsidies of the last regime, as it is withdrawn the market will play more of a role. I wonder why the landlords association is so against the move?

 

[Gatesy]

Thanks guys for your useful posts. Apologies I didn't come back for a while, has been manic at work. Theres a piece inthe current money week (29 oct) but I can't link right now that is generally bearish still on b2l despite ok yields due to the lack of scale the generAl private landlord has which I can see the argument for.