The story of low supply in the prime London lettings market appears to be coming to an end, says Knight Frank.

The primary cause of the respite is the recent uncertainty in the sales market, which means more owners are letting out their property after failing to achieve their asking price.

Mortgage rates have risen sharply following two consecutive months of high inflation readings. The Bank of England raised the bank rate by 50 basis points last week to 5.0 per cent, its highest level since early 2008. It has curbed demand and prompted concerns over how far prices could fall.

“The preference for many owners is still to sell” says Gary Hall, head of lettings at Knight Frank. “But more are open to the rental option given the recent wobbles in the sales market. Tenant demand is strong and yields are very healthy, which adds to the appeal.”

The number of new prospective tenants registering was 31 per cent above the five-year average in May, underlining the strength of demand from students and businesses. 

Meanwhile, gross yields reached 3.99 per cent in prime central London in June, which was the highest figure since 2009.

On the supply side, the combined number of lettings listings in PCL and POL was the second highest level since September 2021, Rightmove data shows.

Rising supply is not universal and remains tight in areas like Notting Hill and Kensington, where demand in the sales market is resilient and the overall supply of property is low.

As a result of the imbalance between supply and demand becoming less pronounced, annual rental value growth in PCL fell to 14.4 per cent in June, the lowest level since October 2021. In prime outer London, a figure of 12 per cent was the lowest over the same time period.

The recent mortgage volatility is likely to accelerate a price correction in the capital, the agency forecasts.

Sensitivity around asking prices is higher than it was just a month ago and nervousness among lenders is rising.

A statement from Knight Frank says: “That said, there will be a cushioning effect from strong wage growth, record levels of housing equity, amassed lockdown savings, the availability of longer mortgage terms, forbearance from lenders and the popularity of fixed deals in recent years.

“The opposing forces of natural market resilience and rising economic uncertainty means that prices are likely to keep slowly deflating for the rest of this year.”