Escalating Rents: Rental Inflation in the UK
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by Robert Jones, Founder of Property Investments UK
With nearly two decades in UK property, Rob has been investing in buy-to-let since 2005, and uses property data to develop tools for property market analysis.
Rents have been rising strongly across the UK in recent years. In this report we will take a look at leading property portal Zoopla’s views on rental market inflation including by how much, where and why rents are rising.
Contents
What is Rental Market Inflation?
According to the Bank of England, inflation is the term we use to describe rising prices. How quickly prices go up over a year is called the rate of inflation.
So, although rental market inflation may sound complex, it is simply a term for how much rents rise (or perhaps fall) over a year.
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What Zoopla Says About Rental Market Inflation
There are several different reports which look at rent rises and rental market inflation. Here we will look at what Zoopla say about rental market inflation over the last year in their latest Rental Market Report, and then add some of our thoughts.
How High is Rental Market Inflation?
The Zoopla report says that annual rental growth for new lets in the UK is now 10.5%. This has fallen slightly from an annual rate of 12.1% a year ago. However, it means that annual rental inflation in the UK has been 10% or more for 18 months now.
Zoopla says that average rents have increased by £110 per month over the last year. This equates to an annual rent rise of £1,320. Over the last three years, rents for new lets have risen by £2,772 a year on average.
The Reasons: Supply Versus Demand
The Zoopla report suggests that a surplus of demand over supply is a key reason for rental market inflation at the moment. They say that ‘the UK rented sector remains stuck in a period of low supply and high demand.’ They add that this situation exists across all parts of the UK.
To illustrate the point, the report says that the average estate agent now has less than 10 properties available to rent compared to an average of 16.5 pre-pandemic. It says that although the rate of enquiries agents are receiving has moderated these levels are still high by historic standards.
Zoopla says that there has been a ‘modest improvement’ in the ‘supply-demand mismatch’ over the last year, in that there is lower demand and better supply – but this is still much greater than five years ago.
The report offers a little more detail here: It says that higher borrowing costs are affecting new house building as well as investment by private landlords and that this is limiting the supply of new properties for rent. It says that although build-to-rent developers are boosting supply in some city centres this type of property tends to come in at higher rental levels. It adds that another factor limiting supply is that many renters are reluctant to move as they anticipate they will face paying much higher rents if they do.
Where are Rents Rising the Most?
The Zoopla report suggests that while all areas have seen rises rents are rising at a higher rate in what have historically been the more affordable areas.
The report gives an example of where rents in Brighton (historically an area of higher rents) have risen by a below-average 6% in Manchester (historically a cheaper area) they rose by 14%. It also says that while rental inflation has slowed in inner London it is higher in outer London districts as renters move further out to find better value for money.
Scotland has a particular problem with rental inflation.
Zoopla’s report says that Scotland has experienced the highest rental growth in the UK. This stood at 12.7% on average. Scotland has replaced London as the area with the fastest-growing rents.
The report says that rents have risen even faster in some Scottish cities – 15.6% in Edinburgh and Dundee and 13.7% in Glasgow.
Zoopla suggests this is because of rent control legislation in Scotland. Landlords here can only increase the rent by more than 3% when a property is relet. Therefore many are imposing substantial rent rises when reletting in order to help protect against future cost rises.
Rental Inflation and Sharing
Zoopla says that rental inflation has led to renters seeking out smaller properties and cheaper areas. However, a significant factor is that more people are opting to share a property in order to control costs rather than rent a property on their own.
Zoopla suggests that this could actually support future rental market inflation – even in the face of affordability issues. It means that when a property is rented by sharers they can afford to pay a higher rent than otherwise. They believe this is particularly the case in inner London, but suggest it is a trend that could spread to regional cities too.
The Affordability Issue
The Zoopla report says that affordability is a key issue in the rental property market at the moment.
Their report says that although employment levels are strong and wages are rising rents continue to outpace earnings. It says that over the last decade, renters have been paying 27.2% of their gross salary in rent on average. However, this has now reached 28.4%, the highest figure in a decade.
Zoopla says that worsening affordability should rein in rental growth. In other words, rents cannot grow if tenants cannot physically afford to pay any more. However, it suggests that the high demand and low supply of rental property in the market is stretching this limit.
The organisation suggests that if rent rises are to moderate while supply remains tight then factors such as a weaker labour market, lower immigration and falling mortgage rates would need to come into play.
Rental Inflation Forecasts for 2024
Looking towards the end of 2023 Zoopla forecasts that overall rental inflation is likely to slow, but only very slightly, and will be 9% at the end of the year. They say this is higher than they originally anticipated. This is because higher mortgage rates have made homebuying more expensive and are keeping people in rented accommodation, as well as earnings growth of 6%.
Zoopla forecasts that rental inflation for new lets will be 5-6% in 2024. This will still be above the growth in earnings which they forecast will be 3.6%.
The report suggests that most of this growth could come in regional cities, while it will slow in inner London. Longer term Zoopla forecasts that affordability issues here will slow down future rental inflation overall and keep it to more ‘sustainable levels’.
Summary – Our Thoughts
It’s important to bear in mind that rental market statistics mostly reflect new lets and not the wider market. Few landlords raise rents on their existing tenancies annually to match the current level of rent inflation.
While rising costs are no doubt leading to rent rises, it’s also important to consider that after a number of years in which rent rises have been modest figures have been playing ‘catch up’ too to some extent. In particular, while rents in more expensive areas have reached a peak areas that were once good value for rents have become more attractive to tenants and this has pushed overall rents up.
There are a number of factors that are probably behind fast rising rents at the moment. As well as an increase in landlords’ costs and mortgage interest rates – which has led some to leave the lettings market – these include strong employment levels and wage levels. However, they mostly boil down, as the Zoopla report confirms, to more people needing rented accommodation than there are houses and flats available.
Governments perhaps ought to recognise that many of these developments are down to their policies – which can have unintended consequences. For example, measures which are intended to discourage investors and benefit property buyers, or make things easier for tenants, can ultimately result in higher rents for tenants.
The Zoopla report seems to suggest that unless something drastic happens the supply-demand imbalance will not find an equilibrium any time soon. Therefore although they may not rise quite as much as over the last year rents are likely to keep on rising for some years to come.
At the end of the day, an imbalanced rental market is not really great news for anyone in the market, but especially not tenants. However, there is something of a silver lining for existing landlords as well as new buy-to-let investors. They should be able to look forward to good demand alongside strong rent levels and yields on their investment properties.