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Buy-to-let market recovery continues to strengthen

The trend in prices continues to be favourable. Landlords’ properties rose in value by 0.4% in December.

By contrast, the average UK rent fell slightly in December, down 0.4% to £661 per month. Rents have corrected slightly since September giving up a third of the sharp rent rises in the summer. However this was largely driven by falling rents in the large London and South East markets, the only two markets to have seen three consecutive months of rent declines since September. Rents ended 2009 0.2% higher than the previous year.

Yields ended the year at 4.8%. They fell from a peak of 5.1% in March as the recovery in house prices outstripped growth in rents. They remain well above the 4.2% trough at the peak of the housing market at the end of 2007, when interest rates were far higher than today to boot.

Arrears performed well in 2009, despite the recession. On average 11.7% of rent was unpaid by the date it was due, down from 14.5% in 2008. By 31 December 2009, 12.5% of rent was unpaid, far less than last year’s Christmas peak when 15.9% of rent was late. Serious arrears held steady, with 1.1% of rent still unpaid three months after it was due. At the end of 2009, £282million of rent was unpaid by the date it was due, down from £346million at the end of 2008.

David Brown, commercial director of LSL Property Services, said: "Arrears were the big surprise of 2009. Contrary to expectations tenants would fall behind with their rent as the recession and unemployment bit, arrears have been lower. This is first because tens of thousands of delayed first-time buyers, whose finances tend to be stronger, have stayed in rented homes and second because landlords, with an eye on their cash flow, have been paying close attention to their rents, spotting problems early and keeping on top of their rent collection."

2010 is set for stronger returns than 2009. If house prices continue to rise at the current modest rate of 0.4% per month, equivalent to 4.9% for the full year, a typical landlord will make a total return of £16,000 in 2010, equivalent to 9.8%.

Brown said: "2010 is likely to be an interesting year for the buy-to-let market. The proposed introduction of regulation should help filter out unscrupulous mortgage advisers which will be positive for the sector, particularly for inexperienced landlords. The downturn has already pushed many of the short-term speculators out of the market too. Buy-to-let is an essential part of our housing market – we need well capitalised, experienced, professional landlords. With returns rising, they can once again look forward to investing more in the sector to meet our housing needs."

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