Residential property yields peaked at 5.1% in March 2009 when house prices bottomed out, according to LSL Property Services, and in contrast yields have now dropped to 4.75% due to decreasing rents and increasing property prices.

Rents fell -0.5% in January 2010 and are now -2% lower than they were in September 2009 following the fourth month of consecutive declines. In contrast, house prices are now +3.3% higher.

LSL Property Services believes that during December 2009, there was a period of intense activity in the housing market as investors rushed to benefit from the stamp duty holiday and this additional supply of rental housing pushed rents lower.

David Brown, commercial director of LSL Property Services, told PIN: “There was a flurry of buy-to-let activity as landlords hurried to buy in the run-up to January. Landlords who missed the boat with the stamp-duty holiday will be facing the prospect of forking out an extra 1% on property purchases. For a landlord using gearing to buy property, that 1% magnifies to a much bigger hit.

“We might now see a short lull in property investment in the short-term. But the underlying fundamentals still look strong for long-term investment - provided landlords can get affordable mortgage finance. Tenant demand is still strong. Arrears performed well in 2009, and continue to do so this year. Average yields may have dipped from their peak, but landlords who continue to pick their properties carefully will still see lucrative returns from rental income and capital appreciation.”

Total returns in January were 16.7% on an annualised basis. This indicates that a landlord would make a total return of £27,500 on a typical property this year, with almost £20,000 of this return in the form of house price inflation according to LSL Property Services.