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The great rental divide is splitting the UK as tenants in London pay double the amount for a comparable property elsewhere.
New research shows two distinct rental markets – the capital and the rest. According to property analysts Hometrack.
The firm says rents increased at a slower pace last year for every region outside London than in 2010, while London rents soared by 9.6%.
The drivers are demand for homes from the size of the city, corporate rents and the high cost of buying a home.
In other towns and cities, the demand is mainly from renters who cannot afford to buy a home of their own.
Hometrack forecasts 2012 rents will rise – but by a subdued 2-3%.
The report identifies a clear divide in the market where the ‘bottom of the pile’ is around 25% of renters claiming housing benefit, then a core market of tenants who cannot afford to buy or who do not want to be tied by property ownership, then a top end of corporate lets.
The findings show that 22% of London lets are for rent of more than £2,000 a month for a two bed home, while outside the capital, only 4% of lettings are for more than £1,000 a month.
The core London market is 37% of renters paying £1,000 to £1,500 a month, while outside the capital the core market pays £500 to £750 per month and comprises 50% of all buy to let homes.
“Local market dynamics dictate the sustainable loan-to-value (LTV) that an investor can withstand for a given level of rent. Assuming a 5.5% interest rate for a buy-to-let loan and rents equating to 125% of the interest payments rates on the mortgage, the maximum sustainable LTV in high capital value areas is less than 75%,” said the report.
In London, the maximum LTV stands at 55.4%, in Edinburgh 66.8% and Oxford 67.6%. In other areas of the country, the maximum sustainable LTV is much lower – 91.5% in Birmingham, 88.4% in Manchester and 87% in Southampton.
Richard Donnell, research director at Hometrack, said, “The rise in private rents has been driven by growing tenant demand and a shortage of supply. With no major improvements in mortgage availability likely soon, rental demand is set to remain strong.
“There is a limit to how high rents can go as affordability constraints continue to squeeze household budgets.”
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