Falling rental incomes, rising house prices and competition from owner-occupiers returning to the market are all contributing to a fall in yields, said a report today. The average total return on investment however, remains almost unchanged for another month.

The August Buy-to-Let Index from Paragon Mortgages shows a 1.43% rise in landlord property values, after a 5.54% rise last month, in line with renewed activity in the housing market.

Rental incomes, which rose 2.79% in June, declined marginally in July, with a fall of 0.85%. As a result, average yields achieved by landlords slipped slightly to 7.57%.

Landlords are now paying £119,587 for an average property, as compared with £117,902 last month, and over £10,000 or 9.3% more than three months ago. This significant increase was the main reason for the modest decline in buy-to-let rental yields (-2.25%) to 7.57% - the second successive monthly fall.

Rental incomes declined to £9,055 from £9,133 last month, reversing three months of rising incomes, although with the exception of last month’s figure the level remains higher than at any time since September 2002. Rents are now 2.4% higher than a year ago and up 3.0% on the beginning of 2003.

John Heron, managing director of Paragon Mortgages, says:

“Although rental incomes achieved by buy-to-let landlords slipped slightly this month, they remain rather higher than they were for most of the first half of 2003, and tenant demand is still very strong.”

“This comes from various types of person – students, nurses, people on state benefit, young professionals – who for a variety of reasons don’t wish to or can’t buy their own home. Landlords are responding to this demand by building their portfolios – but of course they are in competition with owner-occupiers who are coming back into the market and helping to push prices up again.”

“Prices paid by landlords have risen over 9% in the last quarter, with an inevitable negative impact on yields, which slipped to 7.57% this month. Landlords continue to gain, of course, in terms of capital appreciation.”

Yields remain significantly higher in the north than in the south. The North is now the only region to offer double-digit yields (10.36%) while the North West and Yorkshire provide the next highest yields (9.42% and 8.95% respectively). In the south average yields are about 25% lower than in the north, the lowest being Greater London (6.56%), South East (6.90%) and South West (7.78%).

As previously, landlords achieve the best returns from terraced and semi-detached properties, which remain perennially popular with tenants – offering a yield of 8.88% and 8.14% respectively, while flats offered the lowest return of 6.87%, down from last month’s 6.99%. Detached houses generated an average yield of 7.49%.

In terms of total overall return (taking into account both property value appreciation and rental income over the year), the East Midlands is this month’s winner as the best place to invest in residential property over the past year. In the East Midlands, landlords have enjoyed total gross returns of 56.66% (almost unchanged from last month’s 56.51%). Wales came second at 46.59% and the West Midlands third at 43.85%. The lowest overall return figures were in the North West (17.08%) and North – where declining landlord property values led to a small fall in returns.

The average total return nationally stood at £29,105 (on a typical property bought a year ago), equivalent to 29.30% – little changed from the previous month’s figures of 29.43% and £28,781.