A major property platform says the London lettings market may well be on the road to recovery – but that it will not happen for another two years at least.

Home says prices look set to stabilise in the capital within two years due to improving rental yields.

“During London’s recent property boom, house prices soared ahead of rents. Investment fever drove prices up more than 50 per cent in just five years. Meanwhile, rents rose only 10 per cent over the same time period, causing yields to collapse” claims Doug Shephard, a spokesman for the platform.

He says rental yields fundamentally underpin home prices and, following a long period of decline, the tide has turned. Sliding house prices combined with rapidly rising rents is driving yields back up in the capital.

Prices have fallen by around 2.3 per cent over the last year while rents have jumped by 4.3 per cent.

Moreover, rent hikes are accelerating due to a scarcity of rental accommodation because overall, the number of available properties in the London lettings market has dropped some 14 per cent.

However, he believes that if ‘unletable properties’ hanging on the market for more than 20 weeks are excluded, the drop is more like 27 per cent.

Shephard says low yields, sliding capital values, higher taxation and regulation have all served to disincentivise investors from buying more properties. He adds that this combination of factors has been encouraging many landlords to leave the London lettings market altogether, hence the drop in available properties to let, caused by a steep fall in supply of 21 per cent over the last 12 months.

For the time being, the typical gross yield in London of 3.7 per cent remains too low to be attractive, he cautions, and yields in Prime Central London locations are even worse, making buying a home to rent far more lucrative in other UK regions.

Across England and Wales, the average yield in August is 4.7 per cent while in Leeds, for example, the typical yield is a far more attractive 6.0 per cent.

However, Home forecasts that rental yields in London could reach as high as 6.0 per cent by the end of 2020.

“We expect some significant rent hikes over the next two years as tenants compete to secure a home in the capital, and this will accelerate the rise in yields” he claims.

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