Rental Yield and UK House Price Predictions

Understanding rental yields and house price predictions is crucial for landlords to make informed investment decisions. 

While rental yields indicate the immediate income potential, house price predictions help landlords anticipate future capital growth, ensuring their property will appreciate over time.

Let’s take a closer look at what you need to know about rental yield and house price predictions when investing in a property in the UK.

Rental Yield and UK Housing Market Trends

Rental yield is the percentage return an investor can expect from the rental income of a property relative to its purchase price. 

For potential property investors in the UK, understanding rental yield is crucial because it helps determine whether a property will generate a steady income and if it’s a worthwhile investment in the long term.

In 2024, rental yield is even more important due to rising interest rates, which have increased mortgage costs for landlords, reducing overall profitability. In addition, slower house price growth in 2024 means landlords are increasingly reliant on strong rental yields to maintain profitability amidst rising mortgage costs.

How to Calculate the Rental Yield of a Property

As mentioned above, rental yield represents the percentage return you can expect based on a property’s value and rental income. 

Here’s how to calculate rental yield:

1. Find the property’s value: This is either the purchase price or the current market value.
2. Calculate the annual rental income: Multiply the monthly rent by 12 to find the total annual rent.
3. Divide the annual rental income by the property’s value: This gives the rental yield as a decimal.
4. Multiply the result by 100: This converts the decimal into a percentage, showing the rental yield.

Let’s say you have a property valued at £360,000, which you can rent out for a monthly fee of £1,500.

1. Calculate the Annual rental income = £1,500 x 12 = £18,000.
2. Divide annual income by property value = £18,000 ÷ £360,000 = 0.05.
3. Convert to percentage = 0.05 x 100 = 5% rental yield.

In this example, the rental yield is 5%. You can also use an online rental percentage yield calculator instead of doing this manually.

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Factors That Affect Rental Yield in the UK

Understanding the variables that impact rental yields is key to maximising returns. Areas with high tenant demand but relatively affordable property prices can offer significantly higher yields, making them attractive investment choices for landlords. 

Here are some factors to keep in mind:

• Location

Rental demand varies significantly between different regions, with major cities like London and Manchester often commanding higher rents and having higher property prices. 

While urban areas may offer solid rental demand, they can also have lower rental yields compared to smaller towns or emerging regions where property prices are lower and rents can still be competitive.

• Interest Rates

Rising interest rates increase the cost of mortgages for landlords, which can lower net returns. When interest rates are high, landlords may need to charge higher rents to cover these costs, but this can only be done if the market demand supports higher rental prices.

• Local Economy 

The strength of the local economy, including job opportunities, transport links and the presence of universities or large companies, can greatly influence rental demand. 

Areas near large employment hubs or universities often attract more tenants, leading to higher rental yields, while weaker economies can result in lower demand and reduced yields.

• What to Keep in Mind

High rental yields do not always mean a good investment if maintenance, repairs or other running costs eat into profits, making it essential for landlords to balance these factors when making property decisions. 

Rental Yield Trends in the UK 2024

Rising interest rates and affordability challenges in the housing market have led more people to rent, pushing rental prices higher.

According to Propertywire, rental yields in the UK have reached a 10-year high, averaging 5.9%, driven by increased rental demand and limited housing supply. 

In certain regions like the North East, yields are even higher, with averages hitting 9.7%, showcasing the disparity in rental income potential across the country.

Rental Yield Benchmarks: What’s a Good Yield in the UK?

A “good” rental yield can vary depending on the region and property type, but in 2024, anything above 5% is generally considered favourable for UK property investors. 

The national average rental yield usually hovers around 3.5-4%, with Northern cities typically offering higher returns, even ranging from 7% to 12% in some areas. In comparison, London tends to offer lower rental yields, often below 5%, due to higher property prices, though some outer boroughs and regeneration areas may still provide better yields.

In 2024, rising interest rates and inflation have made it even more crucial for investors to focus on regions where rental yields can help cover increasing mortgage costs​.

Here is an overview of average yields across the UK’s major cities:

• Manchester

Yields in the northern city range from 7-12%, with areas like M14, Fallowfield, offering some of the highest returns due to high student demand and proximity to the city centre. 

The influx of students and young professionals, combined with Manchester’s expanding tech and media sectors, continues to drive rental demand, making it a hotspot for landlords looking for strong rental income. 

Read more about Manchester’s property market.

• Birmingham

Rental yields average around 5-6% in the UK’s second city, supported by its growing economy and projects like HS2 and regeneration schemes. These infrastructure improvements attract more businesses and residents, fueling demand and rental income​.

Read more about Birmingham’s property market.

• London

Yields in the capital typically average around 5%, but outer boroughs and regeneration areas can offer up to 6%. While central London properties may have lower yields, areas undergoing regeneration, such as Croydon or Barking, see higher yields as property prices are still affordable relative to rental demand​.

• Newcastle

Newcastle boasts high yields of 8-10%, with affordable property prices making it a top choice for investors. The city’s strong rental demand is driven by its growing student population and local job market, particularly in healthcare and education​.

• York

Yields in York average 4-5%, reflecting its premium market and high property prices. However, the city enjoys stable tenant demand, particularly from young professionals and families, due to its historic appeal and strong local economy as well as a university.​

• Leeds

Leeds offers 6-9% yields, benefiting from its growing status as a tech and business hub, particularly within the Northern Powerhouse initiative. The city’s large student population and influx of professionals create strong rental demand, making it a prime location for investors​.

Read more about Leeds’ property market.

• Liverpool

Yields in Liverpool range from 7-8%, thanks to its low property prices and a solid rental market. Ongoing regeneration projects and the city’s expanding student and professional population continue to drive demand.​

Read more about Liverpool’s property market.

House Price Predictions for the Next 5 Years

The UK housing market is undergoing modest growth, with significant variations expected across different regions over the next five years. 

• Current Market – 2024

Mortgage rates are expected to stabilise around 4.5% this year. Analysts predict a slight decline in house prices of around 3% by the end of the year, reflecting short-term corrections.

• Predicted Growth – 2025-2027

House prices are forecasted to grow 5-10% by 2027, particularly in high-demand regions outside London. Northern and Midlands cities are projected to lead, driven by infrastructure investments, rental demand and economic development.

Regions like the North West remain attractive for investors due to lower property prices and strong rental yields. These areas offer potential for capital appreciation as house prices recover, making them ideal for buy-to-let investments.

• Long-Term Projections- 2027-2030

Between 2027 and 2030, house price growth is projected to reach 10-15%, fueled by stabilising inflation and lower interest rates. Demand in the North and Midlands is expected to increase, particularly as more businesses move away from London.

By 2028, cumulative house price growth is predicted to hit around 20%, with cities like Manchester, Liverpool and Leeds benefiting from ongoing infrastructure investments and business expansion. Continued demand and lagging housing supply will likely push prices higher in regions with solid employment growth​.

Read more about UK house predictions for the next 5 years.

Here are the key trends expected to shape the UK housing market over the next five years.

1. Steady Price Growth and Stabilisation

• Over the next five years, house price predictions forecast an increase of around 20% overall, with regional differences across the UK

• Northern regions, Wales and Scotland are likely to see the most substantial gains, while London may experience a slower recovery due to affordability constraints. 
• Some London boroughs, including Ealing, Westminster and the City of London, have seen modest price increases, primarily supported by infrastructure projects like Crossrail. However, London faces ongoing affordability challenges, with a year-on-year decline of 4.8%.

2. Recovery in Transactions

• By 2026, the number of property transactions will surpass one million annually, indicating a return to market stability. 
• This recovery will be supported by improved mortgage availability and a more optimistic economic outlook in several regions. 
• Buyers are predicted to re-enter the market gradually but consistently, strengthening market dynamics through 2028.

3. Continued Growth in the Rental Sector

• As homeownership remains financially out of reach for many, the rental market is set to expand further, particularly in cities and regions with strong employment prospects. 
• Forecasts suggest that rental growth could see an average increase of 18.8% between 2024 and 2028, with some regions, especially London, projected to experience cumulative increases as high as 21.7% during this period. 

4. Narrowing of the North-South Divide

• Over the next five years, the housing market gap between the North and South of the UK will likely reduce, with some northern regions seeing price increases of nearly 19%. 

The price disparity between the North-West and London will remain substantial, with forecasts estimating that by 2026, average home prices will reach £272,732 in the North-West, £266,417 in Yorkshire and £713,987 in London.

What do these trends mean for potential property investors?

These trends highlight strong potential for rental yields and capital growth, particularly in northern regions where price increases of nearly 19% are expected. The rental market will remain robust, with growth projected at 18.8% through 2028. Investors should focus on areas with high demand and employment growth and consider long-term value appreciation opportunities in more affordable regions compared to London.

Which Areas of the UK are Expected to be High-Growth Areas?

When considering the five-year outlook and current property prices, where should investors focus on the best opportunities in the UK property market? According to market predictions, regions with strong potential for future price increases offer promising returns, particularly in Northern Powerhouse cities.

• North West England

The North West is projected to see one of the most substantial growth rates, with property values expected to rise by around 18.8% by 2028. Key cities like Manchester and Liverpool continue to benefit from significant investment in infrastructure and regeneration projects, making them attractive to investors.

With relatively affordable average property prices, the region is poised for sustained demand, offering strong capital growth potential through 2030.

• North East England

The North East is set to experience house price growth of approximately 16% by 2028, with Newcastle and Durham leading regional performance.

The region’s affordability and improving transport connections, including significant rail investments, are expected to attract both first-time buyers and investors. By 2030, increased employment opportunities and strong rental demand in key cities will continue to drive housing market activity in this region.

• Yorkshire and the Humber

Property prices in Yorkshire and the Humber are forecasted to grow by around 15% by 2028, with Leeds and Sheffield seeing the largest increases. Yorkshire’s affordable property market, combined with strong demand for rental accommodation, particularly in student hubs, will likely drive sustained growth through 2030.

Maximising Rental Income: Best Places to Invest in the UK

Focusing on areas with strong rental yields is crucial for generating a steady income when investing in UK property. Capital growth—where property values increase over time—also remains a key driver of long-term profitability for investors. 

Here are some prime locations that offer promising capital growth and yields enhanced by opportunities in student HMOs (Houses in Multiple Occupation).

Manchester

Many investors highlight Manchester’s balanced market, where strong rental demand from both professionals and students ensures consistent income and robust property value appreciation.

• High Rental Yields: Manchester offers rental yields averaging 6-7%, making it one of the top cities in the UK for rental income. Student HMOs can deliver even higher yields, often exceeding 10%.

• Capital Growth Potential: Investors in Manchester benefit not only from rental income but also from capital growth, with property values forecasted to rise by 18.8% by 2028. 
• Student HMOs: With over 50,000 students enrolled at universities like the University of Manchester and Manchester Metropolitan University, demand for student accommodation remains high. Some HMOs in the city have reported net yields as high as 9.7%. 

While property in Manchester isn’t as affordable as it once was, with two-bedroom apartments in areas like Salford Quays and MediaCity ranging between £250k and £350k, they deliver solid 7% yields in this Tier 1 city. Some developments even offer guaranteed rental income for five years, making them attractive to investors. 

However, with a wide range of options and significant landlord competition, properties must appeal to renters to stand out.

Liverpool

Investors appreciate Liverpool for its affordability and high rental returns, alongside the city’s vibrant cultural scene and ongoing urban redevelopment.

• Exceptional Rental Yields: Liverpool boasts some of the highest rental yields in the UK, averaging around 7-8%. This is particularly true in areas with high student populations and regeneration projects. 
• Significant Capital Growth: Property values in Liverpool are forecasted to rise by over 18% by 2028 supported by regeneration initiatives and increasing employment opportunities. 
• Student HMOs: Liverpool is home to institutions like the University of Liverpool and Liverpool John Moores University, attracting a large student population.
  

Nottingham

Nottingham is experiencing significant undersupply and growing demand for housing, driven by large-scale regeneration projects and a rapidly expanding population. With top universities, a thriving sports and leisure sector, and the presence of major companies, Nottingham is positioned for continued growth and presents a well-rounded option for property investors.

• Strong Rental Yields: Nottingham offers attractive rental yields of 5-6%, supported by a diverse tenant base that includes students, young professionals, and families. 
• Promising Capital Growth: The East Midlands region, including Nottingham, is projected to see property prices rise by 14% by 2028​, driven by economic growth and significant infrastructure improvements.

• Student HMOs: Nottingham has two major universities—the University of Nottingham and Nottingham Trent University—resulting in a high demand for student housing. Investing in HMOs can significantly boost rental income, particularly in areas like NG1 and NG7, which offer rental yields as high as 11.1% and 10.3%, respectively.

Top Tips for Investors

• Leverage Student HMOs for Enhanced Yields

Investing in HMOs can significantly boost rental yields, particularly in cities with large student populations. HMOs typically involve renting out individual rooms to multiple tenants, which can result in higher total rental income compared to single-family rentals. Additionally, properties designed for HMOs often enjoy lower vacancy rates, as the demand for student accommodation remains consistently high.

• Don’t Ignore Capital Growth Projections  

High rental yields provide immediate and consistent income streams, essential for covering mortgage payments and generating profit. While rental yields ensure steady cash flow, capital growth represents the long-term appreciation of property values. Investors often realise significant profits through property value increases over time, especially in regions experiencing economic growth, infrastructure development, and increased demand.

Gross Development Value (GDV) and Its Impact on Property Investment

Gross Development Value (GDV) refers to the projected total value of a completed property development, representing the sum of all the units sold at market price. It’s an essential metric for developers and investors, helping them assess the potential profitability of a project. 

For example, if a developer builds 10 homes, each expected to sell for £200,000, the GDV would be £2,000,000.

In property development, GDV guides key financial decisions such as loan agreements and investment strategies. Lenders use GDV to estimate financing levels, with higher GDVs often leading to better funding terms.​

For landlords considering expanding their portfolio through new developments, understanding GDV allows them to estimate future rental income and potential capital appreciation, making it easier to determine the long-term financial viability of their investment.

Conclusion: Using Tools to Maximise Your Property Investment Strategy

Yield calculators are valuable tools for investors because they assess the current income against the current property value rather than the purchase price. This accurately reflects ongoing returns, regardless of when the property was bought. 

By focusing on current yields, landlords can make informed decisions about whether their investment is performing well. Focusing on rental yields is a good strategy if you’re wondering where to invest money to get monthly income in the UK.