A tale of two housing markets
The housing market has two narratives. The main question on the mind of buyers and sellers in the sales market is: ‘Will house prices fall and by how much?’. But it’s the total opposite if you are a renter. The cost of renting is rising, and securing a home to rent is the hardest it’s been in the last 5 years.
The latest Zoopla rental index reveals average residential rents have risen by 11% in the last year. That’s over 20% higher since the start of the pandemic.
Even at the bottom end of the rental-growth league table, average rents are up 5-7% in the last year.
Immigration, students and jobs boost competition for rented homes
When the economy reopened mid-2021, the competition for rented homes bounced back too. People were returning to work in the cities.
At the same time, the Government relaxed visa rules for students and postgraduates to attract them to study and work in the UK.
In 2022, we saw a record net inflow of people coming to live in the UK - a sizeable proportion being overseas students.
Most university towns have purpose-built student housing. But, there isn’t enough to go round. The inflow of students is spilling over into the wider rental market.
Each year, on average, we see over 350,000 renters become first-time buyers. But higher mortgage rates have hit first-time buyers hard, preventing some of them from getting onto the property ladder.
Instead of freeing up rental homes, would-be first-time buyers are staying put. This has restricted supply and increased demand for rental properties.
Rental market grows just 1% since 2016
While the demand for rented homes is running high (50% above the 5-year average), the average estate agent has 33% fewer homes for rent than before the pandemic.
This is down to renters staying put for longer (over 4 years on average) but also very slow growth in the overall stock of private rented homes.
Great Britain has 5.6 million rented homes (up from 5.5 million in 2016) with private landlords owning 85% of all rented homes. Tax changes and regulations have stalled new investment by private landlords while some have decided to sell.
The net result is that those selling rented homes are offsetting the impact of new investment coming into the market. This marks a big change from the period 2000 to 2016, when the rental market doubled in size.
There's little evidence that supply will grow quickly
Only by increasing the supply of rented homes can we start to ease the pressure on renters and boost choice. Unfortunately, it’s hard to see rental supply increasing rapidly in the near term.
More regulations are coming down the track to improve standards of rented housing and shift the balance between renters and landlords. At the same time, higher mortgage rates are impacting the costs for landlords entering the market and those remortgaging. Instead, some have decided to sell and pay down mortgage debt.
The next big challenge for landlords are proposals that rental properties need to have an energy efficiency rating of C or higher from 2025. This means a sizeable number of rented homes will need material investment to upgrade to a C rating. Some landlords may prefer to sell rather than make this investment, which will further erode available supply.
One bright spot for supply is the build-to-rent market, where corporate landlords and pension funds are investing in the development of homes for rent. The flow of capital is sizeable but this sector still accounts for less than 5% of all rented homes.
Rental growth to slow as affordability pressures mount
Looking ahead, we expect rental growth to slow to 4-5% over 2023. We expect demand levels to cool and fewer landlords to sell up, boosting supply.
Affordability will become a growing constraint - it’s not possible for rents to grow much faster than earnings for a sustained period. Our data shows rents as a percentage of average earnings (for a single person) are at or above the maximum levels seen over the last ten years. They are lower in London than the maximum seen in 2015 but high by national standards.
So, we expect growing affordability pressures to act as a brake on rental growth. This will be a small comfort for renters, but there needs to be a sustained increase in supply to improve rental market conditions.
The Government’s focus on improving standards is important. But so is encouraging all types of landlords to continue to invest. It will boost an important housing tenure that is key for the UK’s economic growth.