Buy to Let Investment: UK Rental Boom vs US

The closeness of relations between the US and UK depends on the government of the day and the feelings of the public, but it is hard to miss the similarities between the two in the recent bust and now in the subsequent rental booms...

The closeness of relations between the US and UK depends on the government of the day and the feelings of the public, but it is hard to miss the similarities between the two in the recent bust and now in the subsequent rental booms. To sum up, the banking sectors of both countries were at the heart of their crashes. When sub-prime borrowers began defaulting en-mass and house prices started to fall, banks on both sides of the Atlantic were crippled and overwhelmed by the amount of bad debt and properties that needed to be repossessed.

In both countries the aftermath of this has been a rental boom, as thousands of additional renters have been added to the market because they can't get mortgages and/or have lost their home to repossession.

Therefore, buy to let investors are capitalising on the rental booms in both the US and the UK, but which boom is best?

I am going to have to say the US. This is because more because the buying opportunities are better than perhaps the yields.

In the UK house prices started falling properly in 2007, they fell by about 20% then in 2009 they started rising again. They rose about 6% between April 2009 and April 2010 leaving the overall average decline at about 14%. Since then prices in the UK have generally stagnated at about the same level. Meanwhile in the US, prices started falling in 2006 and have generally kept falling ever since (with some regional exceptions) fuelled by the continued repossession problem. According to the S&P Case/Shiller index house prices have fallen 34% since 2006, but if you adjust for inflation the drop is more like 40%.

That is the open market reduction, repossessed properties and short sales have devalued so much that they had to start using a different measure, with most such properties now priced with a discount relative to their build replacement cost rather than their market value.

But arguably the US economic recovery is potentially stronger, making for a greater chance that the current rental boom, however long it may last will end up with a soft landing into stable yields rather than a pop.

In fact, in that vein, there are already signs that the UK rental market is petering out. The latest round of data from the LSL buy to let index (LSL is the owner of the Reeds Rain chain of letting agents and the Your Move network) showed that while rents were still growing across the UK, that growth was slowing, and rents have been found to be falling in London, previously the epicentre of the boom.

There is no such weakness in the US rental boom. In fact, the headlines afforded to the latest data from real estate research agency Reis were along the lines of "US Rental Market Explodes".

Reis revealed that the US apartment vacancy rate fell below 5% in the second quarter. At 4.7% the vacancy rate in Q2 was not only the lowest in a decade, but it was only the second time it has fallen below 5% in the 31 years of monitoring the market. Reis also found that effective rents (asking rents net of concessions) increased at their fastest pace since the third quarter of 2007, up 1.3% on the quarter, and 3.5% on the year. Not far behind, asking rents rose 1 percent in the quarter and 2.7 percent on the year. According to Reis the narrowing gap between asking and effective rents, shows that landlords are growing in confidence and offering fewer concessions.

The US is still the world's true superpower, and we have scarcely seen it at a lower point economically. While economic growth is to be slow, a recovery is a recovery, and the latest data on the housing market suggests it has also bottomed. Once-great cities like Atlanta are on their knees and there are thousands of repossessed properties for sale. Now these cities are getting back onto their feet demand for these properties is growing, pushing up rents and yields. The US rental boom is the horse to back and the time to bet is now.

- Friday 27 July 2012

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