Half the normal number of homes available to rent right now
The typical UK estate agent has just 8 homes available to rent at present. That's less than half the pre-pandemic average of 16, showing how choice for renters has worsened over the last 2 years.
This is in contrast to the sales market, where supply is recovering as the market weakened in the second half of 2022.
Demand for rented homes is being driven by the strength of the labour market and is now being compounded by higher mortgage rates, which are making it harder to buy a home and keeping more people in the rental market for longer.
Low supply and rising demand pushes rents higher as people compete for homes.
The average rents for those moving home and starting a new tenancy have risen by 12% over the last year and by as much as 17% in London.
In big cities like Manchester, Birmingham, Cardiff and Edinburgh, rents have gone up 12-15% in the last 12 months.
But it's important to note that renters who aren't moving are facing lower increases, which are closer to 4%.
There are two reasons for this:
1: A quarter of renters are still in fixed initial periods with their rental contracts.
2: Many landlords aren't looking to increase rents after the initial fixed period.
However, the disparity between low supply and rising demand is adding to the overall increase in the cost of living for renters, something that might not improve as rapidly as many would like in 2023 as we explain below.
Why are so few homes available to rent?
The lack of homes for rent and limited choice facing renters is down to several inter-related factors.
1. The dynamics of investing have shifted, reducing investor demand
The root cause of low availability is that the number of privately rented homes has remained static for the last 6 years, stuck at around 5.5 million homes across Great Britain.
This follows over a decade of rapid growth from 2000 as buy-to-let mortgages became more accessible and private investors bought up homes to rent out, adding to supply.
The financial dynamics of investing in residential property have shifted in recent years as a raft of new tax and regulatory changes have been introduced from 2016. These have added to the costs of being a landlord and reduced the returns from investing, which has led to lower levels of new investment into the rental sector.
At the same time, a small but growing number of private landlords have been selling their rental homes. Some have reached retirement age and are taking the opportunity to sell into a strong sales market and release capital gains.
Others are looking to rationalise their portfolios, selling homes that are costly to run or need significant investment. Or they're simply looking to reduce the size of their mortgage debt by shrinking their portfolio.
The net result is that the number of landlords selling their homes has matched the number of landlords buying them, so the overall supply of homes for rent has remained static.
2. Renters are staying put and moving less often
Fast rental growth for new lettings means more existing renters are staying put for longer. This means fewer homes are becoming available for rent each year, adding to the scarcity problem.
The English Housing Survey shows the average length a renter stays in a property has grown to 4.4 years, up from less than 3 years a decade ago.
Older households tend to stay in their rental properties for even longer.
This creates something of a vicious cycle. The faster rents rise, the more likely renters are to stay put, compounding scarcity and adding to the pressure on rents.
3. Localised supply pressures
In tourist hotspots like big cities and seaside areas, homes for rent can shift between the short-term holiday-let market and the longer-let market.
Landlords can typically get higher rental income from renting out homes to tourists on short lets rather than long lets, although the costs are higher.
This is a further challenge for overall supply, squeezing availability for those looking for longer term lets.
When will the availability of rented homes improve?
Unfortunately, a large increase in rental supply is very unlikely in the near term, given higher borrowing costs for landlords and further regulatory changes which will add to the cost of investing.
The UK's private rental market is going through a period of rationalisation and consolidation after more than a decade of very rapid growth up until 2016. The worst is probably over but there is further to run as landlords re-evaluate their strategies for investing.
The weakening of the sales market in the latter part of 2022 will slow the number of landlords looking to sell but those with hard-to-let or costly-to-run homes will still look to dispose of these properties at a price that is attractive to a homeowner.
New investment into the residential market continues but this is focused on homes that are more energy efficient and better suited for renting, with lower management and running costs and where there is stability of rental income.
Private landlords are shifting from a primary motivation of seeking house price growth to drive returns to a focus on the strength of rental income and taking what the market gives them when it comes to capital gains.
Build to rent is the supply bright spot, but it's not cheap
The bright spot for the rental market is on the corporate investor front. Over the last decade long term corporate investors, including pension funds and insurance companies, have poured new capital into building new rental communities across the UK's big cities.
An estimated 74,000 new private rented homes have been built, a further 48,000 are being built and another 115,000 are planned, according to data from the British Property Federation.
This new investment is important but these homes - built and under construction - represent less than 5% of all private rented homes. We believe this investment will continue and change the landscape of choice and quality across the rental market in the next two decades but these newer homes also command higher rents.
In the near term, private landlords remain incredibly important to the overall supply of rented homes. There is a balance to be struck between improving standards and greater regulation of the rental sector, alongside the need to support overall levels of supply for a very important and flexible housing tenure for consumers.
Only by increasing rental supply over the medium to long term can we reduce the upward pressure on rents that is adding to the cost of living pressures facing the nation's renters.