Page last updated at 23:01 GMT, Monday, 19 May 2008 00:01 UK

Rents rise as house prices fall

By Brian Milligan
Business reporter, BBC News

Block containing Vishaal Shah's flat
Some tenants are seeing their rents rise by 50%
It is a golden summer evening in a leafy suburb of North London. Vishaal Shah is standing on his first floor balcony, looking out at a row of horse chestnut trees in full bloom, and the sun sinking behind them.

"It's a wonderful view. We get the setting sun in the evening, and the rising sun in the morning on the other side," he says proudly.

But the financial outlook for this 24-year-old is nothing like as pleasing.

Vishaal is about to see his rent go up for the second time in a year. He will shortly find himself paying 50% more than he did a year ago. Then he paid 400 for a bedroom in a shared flat, and within a month or two it will be 600.

House prices: down 20%
Rents: Up 10-11%
Source: Capital Economics

"It's a big, big jump," he says, "especially since salaries haven't gone up as much. It's going to be a really tight squeeze; touch and go, basically."

Vishaal is far from alone. There are just over seven million households that rent their properties in the UK, and many are facing big rent increases, if they haven't had them already.

Capital Economics, a London-based consultancy, believes that rents will rise by between 10% and 11% over the next two years.

At the same time, Capital Economics believes house prices will fall by 20% in the same time period. So how can it be that the cost of renting is going up, when the cost of buying a house is going down?

Landlords' money-spinner

Landlord EuGin Song knows the industry at first hand. He owns 20 properties in the London area, valued at more than 4m.

In one of them, at the top of a huge mansion block in Hammersmith, he confesses that he is among those who have been increasing rents.

"Last year, I was charging 700 for a two-bedroom flat in West London. Now I get up to 800."

EuGin Song rents out a number of properties across London
Rents and prices are cyclical. When property prices go up, rents come down. When prices go down, rents go up
EuGin Song

The reason, he says, is increased demand. People are reluctant to buy houses while prices are falling, and many are deciding to rent until the market improves.

"As a result, more and more people are coming into the market for rentals. Some people are even selling to rent."

In some areas of the South East, there is particularly strong demand.

With new jobs at Heathrow's Terminal 5, as well as at the 2012 Olympics site, there is particular pressure to find a place to live.

Shrinking supply

Then there is the question of supply. With the buy-to-let market cooling off, investors are no longer so keen to buy flats to rent out. So the number of rented properties available is not expanding as it was. All of which adds up to a rise in the cost of renting.

And as EuGin Song points out, this should not be a surprise. When house prices fell at the start of the 1990s, the same thing happened.

"Historically, rents and prices are inversely cyclical," he says. "When property prices go up, rents come down. When prices go down, rents go up."

Building site
Too many new flats have been built in some areas

There are exceptions to all this. Where there has been an oversupply of new flats, such as in the centre of Leeds, the cost of renting is actually falling.

David Pank, of local estate agents Manning Stanton, says smart properties that would have cost 1,000 a month two years ago, now cost 800 at most.

But outside that niche market, people are queuing up to rent and they are having to pay more.

"The demand we're experiencing is incredible. We are overwhelmed. And supply is not keeping up with demand."

Mr Pank says rents in Leeds have gone up by 5% in the last six months alone.

On the other hand, if the counter-cyclical model is true, a scenario that benefits both tenants and homeowners might arise. Anyone standing on their balcony and looking into the far distance will eventually see house prices recovering and rents starting to fall.

Buy-to-let boom may be stalling
06 Mar 08 |  Business
Have the buy-to-let blues begun?
26 Feb 08 |  Business
Buy-to-let market still thriving
26 Feb 08 |  Business
Tenant demand at 'five-year high'
27 Nov 07 |  Business

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