Buy To Let: Landlords defy gloom in the housing market as rental yields rise

Growing demand for rented accommodation has resulted in higher costs for tenants and a healthy increase in returns for landlords.

Buy-to-let specialist lender Paragon Mortgages reports that rental incomes in the UK rose by 2.5 per cent during the past month, bringing the annualised rate of growth to 19.4 per cent. Tenants are paying £965 on average a month, compared with £808 a year ago.

The buoyancy of rental income offset the cooling in the rate of house price inflation and led to an increase in yields last year. Having been steady at 6 per cent for five months, December saw average gross yields rise to 6.2 per cent.

Established residential property investors in fact had a bumper year in 2007, despite the disruption in the financial markets since September. Total investment returns, including both rental income and capital appreciation, stood at 21 per cent, substantially more than in either 2005 or 2006.

"There's been fall in consumer confidence in recent months, but this appears to be to the benefit of established landlords," said John Heron of Paragon.

"This is solid evidence from the sharp end that landlords remain confident about the long-term prospects of residential property investment, as the UK population continues to grow on the back of inward migration and other demographic factors.

"Buy-to-let has counter-cyclical characteristics," Mr Heron added, "which means it will remain resilient, and indeed will outperform the market, at times of lower economic confidence and growth."