Buy-to-let property investors saw yields fall to an average of 4.75 per cent in January, the lowest level since August 2008, as house prices continue to rise.
Yields peaked at 5.1 per cent in March 2009 when house prices had hit the bottom of the market.
Rents fell 0.5 per cent in January and are now 2 per cent lower than in September 2009 following the fourth month of consecutive declines, according to the latest buy-to-let index from LSL Property Services.
The lettings agent said rents fell due to a boost in the supply of rental property by landlords rushing to beat the stamp holiday deadline.
This comes as separate figures from the Council of Mortgage Lenders showed the number of loans to first-time buyers hit a two-year high in December 2009 driven by a rush to buy properties before the year-end stamp duty concession expired.
“Landlords moved fast to add to their portfolios before the stamp duty holiday ended in December,” said David Brown, commercial director at LSL Property Services. “This has meant higher rental supply at a time of year when tenant demand is traditionally quieter. Landlords have had to cut rents in order to avoid even costlier void periods.”
Total returns in January were 16.7 per cent on an annualised basis, equating to an average total return of £27,500 on a typical property this year. Almost £20,000 of this return would be in the form of house price inflation.
But Brown warns that landlords should ensure a “healthy mix” of income and capital appreciation to avoid mistakes of the past.
“Focusing on one at the expense of the other is a risky investment strategy. Over the long term, investment in buy-to-let must be underpinned by a strong yield,” he said.