Home Property Chronic supply shortages see rental growth accelerate to above 12%

Chronic supply shortages see rental growth accelerate to above 12%

by LLP Finance Reporter
13th Sep 22 4:45 pm

Over the last twelve months, rental growth has ballooned from an annual rate of less than 2% in July 2021 to 12.3% today.

Average rent increased by £115 per month since last year, to stand at £1,051 per calendar month. Rental growth is out-pacing earnings growth in all regions and countries of the UK.

The rental market faces a chronic imbalance of supply and demand that has led to a surge in rents. The stock of homes for rent remains almost half the average compared to the last 5 years.

The average letting agent has just 8 homes available to rent – half that of the summers 2017-2019. The flow of new homes to rent is running 7% below the long-term average, as renters stay put to avoid rent increases. At the same time, private landlords continue to sell homes to rationalise their portfolios in the face of tax and regulatory changes.

Signs that annual rental growth is close to peaking

Rents are rising quickly across all parts of the UK, ranging from 7.6% in the North East to almost 18% in London. While the annual growth rate has accelerated in the last year, it is starting to plateau.

In London, the rental growth pace is simply not sustainable. Current growth figures reflect the rents rebounding off a low base, after a 10% fall during lockdowns. Average rents in London are currently 7.8% higher than before the pandemic, compared to the UK-wide average of nearly 13%.

Another important trend is rental growth in urban areas across England (10.5%) – which is outpacing that of rural markets (8.5%) as strong employment growth drives demand in cities. Higher levels of new-build supply concentrated around city centres is also becoming more appealing to renters looking for smaller homes with lower running costs.

Rising rents add to the cost-of-living squeeze

While the pace of rent increases is starting to plateau, the question remains: How much higher can rents go? This depends on how much headroom renters have to pay higher rents when they move home. And this can vary drastically, given the private rental market caters to a wide range of households with low and high incomes.

The typical pattern of rental affordability varies by location and income level. The latest English Housing Survey (2020-21) asked renters how easy or difficult they find rental costs. Three-quarters of private renters said they found rental payments very or fairly easy while 25% found them fairly or very difficult to pay.

Private renters living in the Midlands and northern regions found rental costs easier to pay than those in the South. In addition, a higher proportion of renters on lower and middle incomes were finding rents difficult to pay in 2021. Zoopla data suggests that rents have further headroom for above-average growth in the less expensive areas of the UK.

Rising energy costs add to the shift in rental demand

In addition to rental payments, running costs and energy bills are lower for flats than houses – especially new-build rented apartments, which will have much higher energy ratings.

The amount of gas it takes to heat and run a purpose-built flat over 12 months is 40% lower than the amount to heat and run a terraced house. And it’s 25% lower for a converted flat. A 1-bed home requires less than half the gas that is needed for a 3-bed home, while D and E-rated homes require 25% and 48% more gas, compared to a C-rated home.

As cost-of-living pressures build, renters will be looking to balance the combined impact of rental and running costs as they make home-moving decisions. We expect the appeal of apartments and energy-efficient houses is set to rise further into 2023.

Calls for rent controls?

In periods of fast rental growth, the topic of controlling or moderating rents often comes to the fore. Some countries and city Governments have tools to control rent increases to help manage affordability. The Scottish Government has announced plans to control rents to ease the cost-of-living pressures. There are many formats for these controls – often with the rent set at a market rate up front and successive increases linked to the rate of consumer price inflation or wage growth.

The focus of the UK government is the taxation of landlords and regulations to improve standards of rental housing, rather than controlling rents.

UK landlords have some of the toughest tax treatments and the upcoming Rental Reform Bill in England will improve the standard of homes but will also increase costs further for landlords. Against this regulatory backdrop, talk of possible rent controls will simply push more landlords to exit the sector, worsening the supply issue and ultimately causing rents to increase.

Outlook for the rest of the year and into 2023

There is no real prospect of a significantly improved rental supply in the near term, as private landlords continue to sell off homes and renters stay put for longer. Higher mortgage rates will compound the pressure on demand, making it harder for would-be first-time buyers to stop renting and purchase a home. The imbalance in supply and demand is here to stay, and rents will continue to rise to above-average levels into 2023 across the more affordable markets. There is headroom for some renters to pay more – especially outside of London and the South East – where rental affordability will remain a drag on demand. We expect rental growth to slow over Q4 and into 2023 but it’s unlikely to happen quickly.

Katinka Hill, Regional Lettings Director at Chestertons, said, “London has long established itself as a hotspot for professionals which has always driven rental demand for one and two-bedroom flats or pieds-à-terre.

“As tenants are now facing added pressure from the cost of living crisis, we are witnessing an increase in enquiries for smaller apartments which is creating an even more competitive market for renters.”

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