Rising rents are a red flag for the property market

Rents on British properties are at record highs. That's bad news for house prices. And don't even think of buying to let, says Phil Oakley. Here's why.

Rents hit a new record high in July according to the latest buy-to-let index from LSL Property Services. You might think that's good news. It might be for landlords. But for us, it's another symptom of the country's malfunctioning property market.

The average rent is now £725 per month according to LSL up 2.8% compared with a year ago. London continues to roar ahead but rents are not going up as fast as they were at the beginning of the year.

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Monthly rent£725
Annual rent (£725 x 12)£8,700
UK average house price needed (see below)£90,000
Gross rental yield (annual rent / price needed)9.7%
Row 4 - Cell 0 Row 4 - Cell 1
Annual rent£8,700
Insurance premiums (2.5% of rent)-£217.50
Replacement / maintenance (10% of rent)-£870.00
Voids (1 month's rent)-£750
Agency fee (10% of rent)-£870.00
Mortgage costs 60% BTL @ 5% (capital and interest)-£3,788.14
Net income (rent minus costs)£2,229.36
Tax @ 20%-£445.90
Net income after tax£1,783.50
Owner's equity invested (40% of price)£36,000
So: return on owner's equity (£1,783/£36,000)5.0%

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

 

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

 

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.