Buy-to-let property prices up 5.5%

Septembers buy-to-let Index from Paragon Mortgages shows property prices paid by investor landlords easing slightly on last months level, but still almost 8,400, or 5.5%, higher than April 2005.

This period of relatively strong increases in landlord property prices is in marked contrast with the months between November 2004 and April 2005, when property values were static or declined slightly.

In August, landlords paid on average 160,984 for a typical investment property, compared with 152,622 in April this year and 141,765 in August 2004 up 13.7% over the year.

John Heron, managing director of Paragon, says: “The market took a breather in the winter and early spring 2004-5, which translated into flat property prices paid by landlords.

“More recently, theres been growing evidence that landlords are willing to engage in transactions and that is having the effect of moving prices of investment properties purchased gently upwards.

“This month sees a modest easing of prices and rents, attributable to a spike in the July average caused by some unusually high value transactions completing in the month. August is in line with the longer-term trend, however.

“The general trend in rents has been resoundingly upwards over the past 12 months. Since August last year, rents are up by almost 1,000 or 10.5%, more than three times the rate of inflation.”

The sustained buying activity and the higher prices that go with it reflects renewed confidence in the private rented sector on the part of landlords.

Heron adds: “Landlords watch the market carefully to gauge changing demand for different types of rented accommodation. If the neighbourhood hospital is expanding, or there is an influx of students at the local college or university, or an area is growing in popularity with workers at a new office block, landlords will regard this as a buying signal. Its a matter of being close to the ground, knowing the market and understanding its dynamics.

“Landlords are responding proactively to demand and to the upward trend of rents. In particular, the established investor, who takes a long term, professional approach to buy-to-let, continues to buy selectively and carefully, as and when he or she can secure a good deal on the right property in the right place.”

Ed Stansfield, property economist at Capital Economics, has tended to adopt a cautious approach to the market over recent months, but says these letting conditions are the best in years. He suggests that renting is growing in popularity because it brings greater flexibility, and says: “People are still sitting on the sidelines waiting to see which way prices go”

John Heron agrees: “From our research we know that many people rent out of choice rather than need. They choose to rent for a variety of reasons: because it avoids the need to commit to living in the same area for a fairly long period of time; because they can rent a better quality property in a nicer area than they could afford to buy; or maybe simply because they enjoy the opportunity to share with friends.

“Uncertainty surrounding the housing market undoubtedly encourages additional rental activity and on this occasion I must agree with Mr Stansfield that the lettings business is pretty buoyant, and is likely to become more so as the autumn progresses.”

This month sees a significant change in the regional pecking order in terms of average yield. Wales, at 7.37%, has usurped Yorkshire in top spot in terms of highest yield.

Yorkshire has been at or near the top of the list for most of 2005 but has slipped into fourth place this month, at just under 7%. The West Midlands remains in second position, with a yield of 7.31%.

In terms of total returns (i.e. taking into account both capital appreciation plus average rental return on a property bought 12 months ago), northern regions of the country remain the star performers with the North in first position at 40.2%, Yorkshire second at 39.9%, and the North West 37.1%. This is mainly attributable to the above average level of property price inflation over the past 12 months.

Nationally, the average total annual return stands at 20.3%, compared with 22.3% in July.

Heron says: “The summer is traditionally a somewhat quiet time in the housing market, but with renewed confidence, good tenant demand and the UKs long term structural shortage of decent accommodation, its no surprise that investors continue to buy.”