How is the current state of the rental market?
This week I wanted to give you an update on some key areas of the rental market and what current state its in. Make sure you read on for details and as always, feel free to get in contact with me to discuss anything lettings.
Rental Inflation still running in double digits
Rents have shown double digit growth now for the 15th consecutive month in a row. The inflation rate now for the UK sits at 10.4% and with an ongoing supply meeting demand issue, we will see a continuation into H2 of rents increasing across all parts of the UK especially as we approach the usual upturn in demand over the summer and into autumn months.
Rental (un)affordability reaches a decade high
For the past 21 months, starting from October 2021, rent prices in the UK have been increasing faster than people's earnings. As a result, the percentage of income that people need to spend on rent has reached its highest level in the past ten years. On average, UK rents now make up 28.3% of pre-tax earnings, compared to the average of 27% over the past decade. In seven out of the twelve regions in the UK, rental affordability is currently the worst it has been in the past ten years. In four more regions, the amount of earnings spent on rent is very close to reaching the highest level of the past decade, within a 2% difference. Although renting in London is the most expensive among all regions, with renters spending an average of 40% of their gross earnings on rent, it's still below the peak of 43% reached in September 2015. As rent prices continue to rise faster than earnings, it becomes increasingly difficult for renters to afford their housing costs. Eventually, this will start affecting the demand for rental properties and slow down the pace of rent growth.
Supply/demand differences pushing up rents
Rental price increases will only slow down, if either we see a significant increase in the number of rental properties available, or have a decrease in demand for rentals. However, it's unlikely that demand will weaken because there are several factors that contribute to strong demand, such as rising mortgage rates affecting first-time homebuyers, a strong job market, high levels of immigration, and the upcoming busiest period for rental demand, which is between July and September. The supply of rental homes is still lower than it was before the pandemic, by around 20-40% in most regions. This means that there are more people looking to rent homes than there are available properties, which adds even more pressure to the increasing rental prices.
Supply of rental homes not likely to improve in 2023
We don't expect the rental supply to increase significantly enough to control the rising rental prices for the rest of 2023. For this to happen, there would need to be more investment from companies and individuals who own rental properties. Another factor that could help increase supply is if there is a sharp slowdown in the housing sales market. This would mean fewer landlords selling their properties and more homeowners deciding to rent out their homes instead. However, the increasing costs of borrowing money are affecting the plans of new investors, which is slowing down the rate of new investments in rental properties.
1 in 10 homes for sale were formally rented out
Out of all the homes listed for sale on Zoopla, approximately 11% of them used to be rental properties. This percentage seems to have remained relatively stable over the past three years. The reason behind this is that many private landlords are adjusting their property portfolios or leaving the market due to changes in taxes and higher borrowing costs. Before the pandemic, around half of these homes that were listed for sale would eventually return to the rental market if they didn't sell or were purchased by an investor. This helped minimize the loss of rental properties from the private rental sector. However, more recently, the proportion of these homes returning to the rental market has dropped to 30%. This means that more homes are being taken out of the rental market, and the influx of new investment is not sufficient to replace them.
Increased mortgage rates hit 20-30% of Landlords hardest
Landlords who have mortgages are facing financial challenges due to higher borrowing costs. Based on Government data, we estimate that nearly two-fifths of landlords do not have a mortgage, while a third of those who do have a mortgage have a loan-to-value (LTV) ratio of less than 50%. The increase in mortgage rates is not welcomed by landlords, but those with lower LTV ratios can manage it better because they have more rental income available to cover the higher costs. However, landlords with the highest LTV ratios, around 20% to 30% of them, are experiencing significant pressure on their cashflow. This makes it more likely for them to consider selling their properties as they approach the need to refinance.
What is the outlook then?
Considering the limited chances of a significant increase in the number of rental properties available, it will be factors related to affordability and demand that will primarily affect the rate at which rent prices increase. Predictions are that rental inflation will gradually slow down to around 8% this year, although it will still be higher than what initial expectations were. Its anticipated that the pressure on affordability will begin to impact rent inflation in the rental markets with the highest property values within the next 6-12 months. However, in more affordable areas, there is still some room for rent prices to continue rising.
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All the best,