This follows a monthly drop in average residential rents, down 0.4% in December to £536 per month, according to the Scotland Buy to Let Index from Your Move, one of Scotland’s largest lettings agent networks.
It means that growth has slowed from a 3.9% annual jump in rent prices seen in 2013 but Edinburgh and the Lothians has bucked the trend with annual rent growth over the past year from 2.5% in December 2013 to 4.5% in December 2014.
‘Annual rent growth braked sharply over 2014, reducing the speed of rent rises to a sustainable and affordable pace. This is providing some welcome relief to the thousands of renters itching to jump on the housing ladder, who are already faced with enough hurdles to saving a deposit,’ said Christine Campbell, regional managing director of Your Move.
‘This wider downturn in growth during 2014 marks a return to the natural market rhythm. Scottish rents were holding fast on an even keel throughout 2011 and 2012, until the abolition of tenancy fees in November 2012 sparked a new tide of unnaturally steep rent hikes,’ she explained.
‘This should act as cautionary tale for policymakers considering further constricting changes to lettings legislation. The rental market is thriving by its own hand, and too much undue intervention may poison the current climate of affordability,’ she pointed out.
‘Scaring landlords out of the rental market would exacerbate the current housing shortage, and wound thousands of tenants as competition hots up. Buy to let investment is a vital remedy for the current housing shortage, and for the health of tenant finances,’ she added.
A breakdown of the figures shows that overall, rents are higher than a year ago in three out of five regions of Scotland. After a strong acceleration in the pace of growth during 2014, average rents in Edinburgh and the Lothians have seen the fastest year on year increased at 4.5% in the 12 months to December.
A 2.2% annual rise in Glasgow and Clyde takes the average monthly rent to £559, however this still represents a significant deceleration in the pace of annual rent growth, declining from 7.3% a year previously.
While rents climbed consistently across all regions of Scotland during 2013, the slowdown in rent growth witnessed during 2014 has been more severe in some cases with two regions experiencing annual falls in rent prices.
Average monthly rents in the Highlands and Islands are now 2% lower than December 2013. The South was the only other area of Scotland to experience an annual fall, with average rents down 1.8% over the past 12 months. The average monthly rent in the South of Scotland now stands at £484, down from £493 a year previously.
In December, rents fell in three out of five regions of Scotland. After making substantial gains throughout the year, the greatest monthly drop in average rents was in Edinburgh and the Lothians, easing back 1.1% from a record high in November to £611 per month.
Glasgow and Clyde experienced the second biggest fall, with rents decreasing 1% in the month to December while in the South rents dipped by 0.3% between November to December, while average monthly rents stayed static in the Highlands and Islands.
As the lettings market cooled overall, the East was the only region of Scotland to experience a modest rent rise in December, with rents edging up 0.4% during the month.
The index also shows that tenant finances across Scotland deteriorated in December, as the financial strain of Christmas took its toll. The proportion of late rent in Scotland rose to 7.2% in December, the highest level since May 2013. On a monthly basis, the proportion of rent in arears has increased 0.6% from only 6.6% in November. Compared to a year ago, the financial health of Scotland’s tenants has declined too, with levels of late rent up from 6.5% in December 2013.
‘While we expect a certain seasonal setback, over the year as a whole, tenant finances have retreated. After some improvements in the summer months, the cycle hasn’t been broken, and we’re back to where we started with too many Scottish households still mired in financial difficulty and struggling to pay the rent on time,’ said Campbell.
‘For many, the financial hangover from the festive season is still ongoing, but record low inflation should be helping money stretch a little bit further day to day. Annual rent rises are decelerating, easing the pressure off some household bills, but what’s needed now is wage growth to move into the fast lane. The jobs market has got more people into employment, but static salaries are stalling the long term financial recovery of thousands of working renters,’ she added.
The index data reveals that the gross yield on an average rental property in Scotland stands at 4% as of December 2014, a drop on both a monthly and annual basis of 0.1% and down from average gross yields of 4.1% in November 2014 and in December 2013.
Taking into account property price growth and void periods between tenants, the total annual return on a typical rental property stands at 7.8% in the 12 months to December 2014. This is a rise from 6.6% in December 2013, but represents a slight dip on a monthly basis from 7.9% in the year to November, after a recent dip in house price growth.
In absolute terms this means the average landlord in Scotland has seen a return, before any mortgage payments or maintenance costs, of £11,962 over the 12 months to December.
With house price growth recovering, and if the value of rental properties continues to climb at the same rate witnessed over the last three months, the average buy to let investor in Scotland could expect to make an overall annual return of 7.9% in the next 12 months, equivalent to £12,570 per property.
‘Houses prices have faltered in recent months with an outpouring of optimism and activity immediately after the referendum giving way to a period of correction and price drops. As a result, landlord returns temporarily hit a speed bump, but that’s already fading away and the outlook looks prosperous. Even while negotiating the uncharted terrain around the independence vote, gross yields never veered off course, driven by steady rental income,’ Campbell said.
‘These favourable conditions for landlords will filter down to tenants’ pockets too. As property investors expand their portfolio and invest further in buy to let, greater choice of homes to let will ensure rent rises remain on a smoother path,’ she concluded.
