Rents Rise 10% For The 20th Month In A Row

The current demand for rental properties is surpassing the 5-year average by 27%. In the past year, the average rent for a new lease has risen by 10.1%, reaching £1,166 per month. This translates to an annual rental cost nearly £1,300 higher than the previous year, totaling almost £14,000 compared to £12,700 in September of the previous year.

This marks the 20th consecutive month of our index reporting rental inflation exceeding 10%. However, for tenants remaining in their current residences, the year-on-year rent increases are notably slower at 5.7%, as per the Index of Rental Prices provided by the Office for National Statistics.

Zoopla’s recent findings indicate that rental costs in the UK have reached their most challenging level in a decade. The property portal highlights that rents are escalating at a faster pace than earnings, constituting over 28% of average pre-tax earnings—a figure surpassing the 10-year average of 27%.

This heightened unaffordability trend is particularly pronounced in seven out of the 12 regions in the UK. In London, the situation is even more acute, with rents representing approximately 40% of gross earnings. The Office for National Statistics (ONS) reported that, in the year leading up to July 2023, London experienced an annual growth in private rental prices at a rate of 5.5%, slightly exceeding the 5.2% growth observed in the rest of the country.

Refer to the table below for a breakdown of rent increase rates across various regions of the UK.

Rental inflation slows down in England’s southern cities

Rental inflation in the most expensive cities of southern England has exhibited a slowdown over the past 12 months. Notably, in London, the deceleration is pronounced, with rental inflation decreasing from 17% a year ago to the current rate of 10.4%.

The inner London boroughs have been at the forefront of this moderation, being the first areas to witness rental inflation dipping below 10%. On the contrary, outer London regions like Harrow, Barking and Dagenham, and Redbridge continue to record robust rental growth, surpassing 13.5%—ranking among the highest increases in the UK.

Bristol and Brighton have experienced the second and third largest slowdowns, with rental inflation dropping to 8.8% and 6.0%, respectively. Coastal communities such as Hastings (6.7%), Newport (8.9%), and Blackpool (5.5%) are also exhibiting rental inflation rates more in line with earnings growth (8.5%).

These reductions in rental inflation suggest a trend of landlords becoming more pragmatic in pricing their rentals, taking into account the challenges posed by the cost of living.

What are tenants doing to minimise the damage of higher rents?

Confronted with elevated rents and a constrained housing supply, tenants are increasingly exploring options such as downsizing to smaller homes, relocating to more affordable areas, or opting to share properties with other renters as a strategy to mitigate costs.

While sharing accommodations can result in a lower cost per person, this approach does come at the individual cost of diminished privacy and living space. According to data from the Resolution Foundation, private renters have undergone a 16% reduction in floor space per person over the past two decades.

What is next for the rental market?

Anticipating robust earnings growth and recognizing the impact of elevated mortgage rates deterring potential homebuyers, we project that rental inflation will persist above 9% throughout the remainder of the year.

Looking ahead to 2024, our current expectations indicate national rental growth in the range of 5-6%. However, it’s worth noting that within urban areas, rent increases are likely to surpass this average, pointing toward potentially higher rates in cities.

Supply/Demand

The rental market continues to grapple with a period characterized by low supply and heightened demand.

Increasing the rental supply stands out as the most effective and sustainable means of mitigating rental growth. Unfortunately, the construction of homes and the net new investments made by private landlords are declining, and this trend is expected to persist until 2024, largely attributed to the impact of elevated borrowing costs.

A positive development is the influx of new investments from corporate landlords through ‘build to rent’ initiatives, contributing to the supply surge, particularly in city centers. However, rental rates set by corporate landlords tend to be above average and lack the magnitude needed to influence the broader market.

The reluctance of many current renters to relocate and face higher rental expenses further exacerbates the shortage of available housing. Consequently, the typical estate agent now has fewer than 10 homes for rent, a significant drop from the pre-pandemic average of 16.5 homes.

The demand for rental homes remains under the influence of various factors.

Key drivers of rental demand include the robustness of the labor market and the creation of new jobs, coupled with record levels of immigration. A notable surge in demand occurred about a year ago when international borders reopened, leading to an influx of overseas students returning to study in the UK. This resulted in a record-high number of renters competing for each available property during the summer of 2022.

While demand has increased again this year in line with seasonal trends, it is now 20% lower than it was a year ago. Contributing to this shift is the impact of higher mortgage rates, which have elevated the cost of home purchases, prompting more potential buyers to remain in the rental sector.

First-time buyers, especially in southern England, are finding mortgage repayments at 5.5% rates more expensive than rental costs. Consequently, the current imbalance between supply and demand shows no signs of reversing as we approach 2024.

Looking ahead, rental growth in the short term is expected to be influenced more by the affordability of renting and how renters adapt to higher rents, rather than significant shifts in supply and/or demand.

If you’re a first time landlord or a property investor with a large portfolio who is investing in buy to let, we can help. Ashmore Residential are your local property management and letting experts in London . Contact us on 020 8366 9777 or email us at info@ashmoreresidential.com for a no obligation chat about our property management services.