Property Investment Philosophies

How rental markets can become oversupplied?

It is relatively straight forward to buy a property ... however, it is easy to forget the importance of buying a property that will rent well (assuming you are buying to let).

Rental markets can be strange beasts.

There is a natural dynamic between captial growth and rental markets (at least in more mature markets).

As affordability to buy property is high property prices tend to increase as more people buy and less people rent, and in this case rental markets often stay static or soften a little due to reduced demand.

When affordability to buy reduces (eg to prices having outgrown wage growth or interest rate changes) less people can afford to buy thus demand is buying reduced and thus more people have to rent or rent for longer. And if property prices are falling there may be even less people looking to buying as everyone will be waiting to see how far the market will drop.

In this case with more demand in the rental market, rental prices tend to increase.

So there is almost an elastic effect taking places between house price growth and rental price growth. Typically rental yields will oscillate around the mortgage finance rate as demand changes.

Changes in supply can also dramatically effect rental prices.

If a large number of investors buying into a development and when the development completes all of these investors try to rent their property at the same time there will be an immediate short term oversupply that creates competition and is likely to lead to reduced rents and longer voids.

If there is a large amount of building taking place in an area this again can lead to an oversupply (for a given demand).

On the other hand a company opening a new office or factory in an area can suddenly increase demand (for a given supply) - particularly if workers are brought in from other locations - and thus rental prices can jump quickly.

Sim Property Group always works hard to ensure we source property in areas that will have good rental demand, and works hard to get the properties rented on completion.