Keeping a close eye on house prices, transaction levels and rental demand is crucial when it comes to successful property investment, and the current outlook holds plenty of promise for investors.
Across the UK, rental values have been spiralling in the majority of locations for the past 18 months with no signs of slowing down. The latest figures from Zoopla have revealed a further 10.5% year-on-year hike in rents on new lets, meaning annual rental income is now up by an average of £1,320 compared with this time last year.
The strength of the country’s jobs market is one of the influencing factors behind rental demand growth, while the ongoing shortage of supply is contributing to rising prices. Particularly in cities, rental demand has been soaring over recent years as professionals seek more accommodation options close to work and amenities, and international students continue to choose the UK. The increase in high-quality city centre flats being created has also pushed prices up further in these areas, compared with lower quality offerings further afield.
Meanwhile, on the house price front, looking past the headline figures, we can see that UK property values remain strong when factoring in the significant price increases we experienced during the immediate aftermath of Covid. While factors such as rising interest rates and inflation, as well as cost of living pressures, are certainly having an impact on transaction levels in many areas, some of the price softening appears to be a natural correction after the acceleration seen between 2020 and 2022.
What does the future hold for house prices?
Property prices and rental values are two key factors that influence most property investors’ decisions (for those who intend to boost their returns by letting the property out rather than selling it on). According to the latest report from Hamptons, it seems likely that house prices will naturally return to growth by 2025, and ultimately the small falls we are seeing at present will be reversed.
Interestingly, Aneisha Beveridge, head of research at Hamptons, also points out that the company believes 2025 “will mark the beginning of a new property market cycle”. This could be led by London, which may begin to outperform the UK’s other regions “for the first time since 2015”. These property market cycles tend to see the capital’s performance ultimately mirrored by the other major cities across the UK, but at more affordable price points.
The outlook for house prices is that, by the end of 2026, the average UK property will cost 5.5% more than it did at the end of 2022, which is a good demonstration of how long-term property investment performs when you take a step back from the month-on-month price indices.
Rents could rise by 25%
At the moment, with rising mortgage costs and reduced scope for large capital appreciation in the short term, many property investors are focusing more on rental yield performance. Mortgage rates will continue to hold huge importance for landlords and investors, with an estimated 70% of landlords having some form of borrowing on their properties. This alongside the other costs linked with running a rental property is also contributing to rent rises.
That being said, there is positive news when it comes to mortgage rates at the moment, including in the buy-to-let space, with many specialist lenders reducing their rates and adding extra products to their shelves in order to entice and incentivise landlords. Many of those who are remortgaging at the moment, or taking out new borrowing, are opting for a shorter mortgage term with the expectation that they will secure a preferable rate in a couple of years’ time.
Beveridge says: “The combination of a shortage of supply and mounting landlord costs means that we expect rents to rise by 25% across Great Britain between 2023 and 2026, with the largest increases during 2023 and 2024. As a consequence, it would be no surprise if the private rented sector becomes one of the most contentious housing issues in the general election.”
