Philippe Bracke and Alice Pugh.

Economic theory suggests that property prices and rents should move together: rents represent the flow of housing services gained from living in a property, and prices are determined by the discounted value of all future rents.

But data collected by LonRes show this has not been the case for Prime London. Whilst prices of rental properties have risen by 180% since 2005, rents charged have risen less than 40% (Chart 1). As a consequence, rental yields have fallen to between 3% and 4% (Chart 2).

Chart 1: Divergence between house prices and rents in Prime London

Chart 2: Rental yields in Prime London

What has driven this divergence? The most likely explanation seems to be an increase in competition between investors in the rental market. Whilst the number of buy-to-let transactions fell sharply during the crisis, it has since rebounded to around its pre-crisis levels. A higher number of properties available to let has meant that landlords have been unable to raise rents – whilst the prices paid to purchase these properties have risen sharply. Consistent with this theory, the LonRes data show that the median number of days it takes to rent a property has increased since the crisis, to over 50 days.

Philippe Bracke and Alice Pugh work in the Bank’s Structural Economic Analysis Division)

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