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Tennant demand to remain strong
The Monetary Policy Committee’s third increase in interest rates in five months is expected to cause the housing market to slow, but will not cause buy-to-let landlords to flee from the market. Tenant demand remains strong, and is likely to get stronger whilst people delay making a house purchase.
Latest research from Paragon shows that rental yields achieved by residential investors have remained steady at 6% for the past eight months.
Nigel Terrington, chief executive of Paragon said, The rental yield of 6% is derived from current valuations, whereas the funding cost is based on the original loan size and therefore does not take into account house price inflation. With the average gearing for a residential landlord being less than 40%, landlords are well equipped to absorb this latest increase - and the expected future interest rate rises.
Over 60% of Paragon’s residential landlords are, however, on fixed rates, and they look for long-term returns, taking on average a 16 year view on their investment. Tenant demand remains strong and rental income is positive despite the short-term interest rate rise.
According to Paragon’s research, tenant demand is at its strongest level ever (since the survey began): 32% of landlords say that tenant demand is growing or surging. Unsurprisingly, many of these landlords are actively growing their portfolios to meet this increase in demand, and they plan to expand their holdings over the next 12 months. Rental yields will remain stable or possibly edge up, with landlords expecting them to stand at 6% in a year’s time.
Some commentators may speculate that rising interest rates will cause investors to take fright and offload their property holdings, said Terrington, but past experience and recent anecdotal evidence from landlords suggest otherwise. In the 1990s, when the overall housing market experienced a significant downturn, buy-to-let experienced its biggest ever growth period as the private rented sector stepped in to meet demand from individuals, couples and families. More recently, ARLA’s latest landlord research indicates that only 2.1% of landlords would sell if house prices fall and, indeed, that six out of ten landlords plan to buy more properties over the next year.
Mr Terrington added, All the evidence suggests that the current environment is a positive one for the private rented sector: buy-to-let is not part of the problem, but a significant part of the solution.
Paragon’s January Buy-to-Let index can be viewed as a .pdf file here.
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