But after six months to allow the dust to settle, it seems that London is experiencing a moderation in demand, ending the year with rent levels lower than when it started. However, in the big regional areas rents have risen. The decline in London reflects the fact that the start of higher stamp duty on second homes last April was preceded by a rush to beat the deadline. Consequently, the number of houses coming on to the market for rent rose significantly. Over the year, the average number of properties available for rent rose by 12 per cent, with London experiencing the biggest increase at 22 per cent. So while rental growth across the UK halved from the previous year to just 1.6 per cent, average rents in London actually fell by 2.9 per cent on average, according to estate agent Countrywide (CWD), while Rightmove estimated that rents in inner London dropped by 4.4 per cent.
And it’s not just new tenants who have benefited from the lack of upward pressure on rents. Countrywide calculates that the number of existing tenants renewing their contracts at a higher rate fell from 37 per cent in 2015 to 33 per cent. However, the situation may be turning a full circle as the number of new properties coming on to the market for rent starts to slow as a result of new taxation starting in April on mortgage interest rate relief. And there is evidence to suggest that the decline in rents in prime central London is slowing down.
The fall in both rents and demand has also prompted some landlords to take a closer look at the main regional cities, where yields are higher as a result of lower house prices. Demand is also increasing as cities such as Birmingham, Leeds and Manchester continue to benefit from strong inward investment. According to the National Landlords Association, the number of landlords in London reporting a rise in tenant demand in the fourth quarter of 2016 fell from 45 per cent to just 17 per cent. Just 5 per cent of landlords operating in London plan to purchase more properties, down from 15 per cent a year ago. By contrast, the proportion of landlords operating in the north-east that plan to buy more properties has almost doubled to 19 per cent. And it's not just the main cities outside London that are benefiting, with 40 per cent of all landlords reporting a rise in tenant demand in the south-east of England.
But it seems that it's not just a greater availability of rented properties that's behind the decline in London rents. Whether it's a desire to improve the quality of life (although taking on a longer commute may negate this) or whether London has just become too expensive, the fact remains that last year Londoners bought 74,000 homes outside the capital, a rise of 11,000 from 2015. On top of this, a record 40 per cent of first-time buyers living in London ended up buying a house outside London. According to data compiled by estate agent Hamptons International, the number of Londoners buying outside the capital is now at the highest level since 2007.
The nation's love affair with the buy-to-let sector may have been shaken by higher taxes on second homes and the tapering of mortgage interest relief, but it seems that the larger landlords with a multiple property portfolio have been less put off than the small landlord with maybe three or fewer properties. And despite a tougher stance by banks on lending criteria and rental cover, average buy-to-let loans grew in 2016, although some of the increase reflected higher prices. But it's worth remembering that around half of all landlords are mortgage-free, and unless they buy further properties, on which they will have to pay additional stamp duty, they will be unaffected by the recent raft of tax increases. In fact, they may be beneficiaries because if the number of properties available for rent starts to decline, continued demand could act to squeeze rents higher. But there has to be a delicate balancing act between keeping rents at levels that tenants are willing to pay and keeping them high enough to take into account increased costs and lower allowances that landlords are facing.
