RENTAL MARKET REPORT – MARCH 2024

Posted on April 9th, 2024.

UK Rental Inflation Sees Significant Decrease Over Two-Year Period

With the new financial year now underway, in this week’s article, I share with you the latest insights on the rental market for the first quarter of 2024.

The rental market in the UK has experienced a notable shift, with rental inflation dropping to 7.8% from its previous rate of 11% a year ago. This marks the lowest level seen in two years, with the average monthly rent now standing at £1,223.

The decline in rental inflation can be attributed to several factors, including weakening demand and increasing affordability pressures, rather than a substantial increase in supply. Investment by private landlords remains relatively subdued, contributing to the moderation in rental inflation.

Statistics reveal that the average letting agent now has 12 properties available for rent, representing a 20% increase compared to last year. However, this figure remains 28% below the pre-pandemic average of 16 properties.

Demand for rental properties has decreased by 20% over the past year, driven by the normalization of pandemic-related factors, cooling labour market conditions, and favourable mortgage rates that support first-time homebuyers.

Despite the decrease in demand, there continues to be a significant shortage of available rental properties, with more than 15 inquiries for every home for rent. Although this figure has decreased from over 40 inquiries in 2021, it remains double the pre-pandemic levels, indicating an ongoing supply-demand imbalance.

While the gap between supply and demand is narrowing, it remains substantial. Rental prices are expected to continue rising throughout 2024, albeit at a slower pace.

The below graphs illustrate the correlation beetween supply and demand/levels of housing stock and enquiries per home. Source: Ashmore Residential research

London Emerges as Leader in Rental Inflation Slowdown

London has witnessed a notable deceleration in rental inflation, dropping to just 5.1% from its previous rate of 15.3% a year ago. The capital city has experienced the most significant narrowing of the supply-demand gap, with demand decreasing by 30% compared to the previous year and available supply increasing by the same margin.

Affordability constraints in London have further exacerbated the slowdown in rental inflation, driven by the high cost of living in the city.

Rental affordability set to remain high over 2024

Rents for new lets have been rising faster than average earnings for over 2 years, since October 2021. This has taken our measure of rental affordability to a high of 29.5% of gross earnings at the end of 2023.

Rental affordability improved between 2016 and 2021 on the back of low rental inflation, with rents rising by just 4% over these 5 years – a result of 1) weaker demand post Brexit, 2) growth in supply pre-2016, and 3) easier access to home ownership thanks to low mortgage rates.

In contrast, recent years have been marked by strong demand, no increase in rental supply and high mortgage rates making it harder for first-time-buyers to access home ownership.

This has widened the supply/demand imbalance, pushing rents for new lets up faster than earnings, which has led to a deterioration in rental affordability.

In contrast, rental inflation across the rest of the UK remains relatively stable compared to the previous year, despite a decline in demand. While rental inflation is beginning to slow down in major cities nationwide, the extent of the decrease is less pronounced than in London.

Source: Ashmore Residential research

A comprehensive analysis of average rents conducted by local authorities unveils a striking statistic: more than half (51%) of rented homes are now situated in markets where the average monthly rent exceeds £1,000. This figure represents nearly double the proportion observed just five years ago, signalling a significant shift in rental affordability and market dynamics.

The outlook for rental affordability remains challenging throughout 2024, as rents for new leases continue to outpace average earnings growth. This trend has persisted for over two years, starting from October 2021, culminating in a rental affordability measure reaching its peak at 29.5% of gross earnings by the end of 2023.

The period between 2016 and 2021 saw an improvement in rental affordability, driven by modest rental inflation, with rents increasing by only 4% over the five-year period. This improvement was attributed to several factors, including weaker demand following Brexit, an expansion in rental supply before 2016, and increased accessibility to homeownership facilitated by low mortgage rates.

In contrast, recent years have been characterized by robust demand, stagnant rental supply, and elevated mortgage rates, making it increasingly challenging for first-time buyers to enter the property market. This imbalance between supply and demand has exacerbated the situation, leading to a scenario where rents for new leases are rising at a faster pace than earnings, consequently resulting in a decline in rental affordability.

If you would like to know more about how we could help you to maximise the income potential of your investment(s), or have a current issue or dispute with your tenancy, call our helpline for impartial, professional advice, without obligation on 020 8366 9777 or write to info@ashmoreresidential.com 

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