Costs and complexity increase, while tenant affordability stalls
A leading property portal, Zoopla, warns in its latest Rental Market Report that the private rented sector (PRS) in England faces some major challenges due to the coming social policy changes and a slow-down in the market.
The private rented sector in England is facing some major policy changes with the introduction of the Renters’ Rights Bill sometime this year along with demand for improved energy efficiency standards. Some of the measures contained in the new legislation are likely to curtail new investment and growth in the rental housing stock over the next 2 to 5 years, thinks Zoopla.
This downward pressure on buy-to-let follows on from the Section 24 tax changes brought in several years ago and the more recent higher mortgage rates, while rent increases are now at their lowest level for 3.5 years, though this latter is likely to be due to affordability restrictions rather than lack of demand.
The new Renters’ Rights Bill is expected to become law later this year. It will feature the biggest change in the landlord-tenant relationship since the Housing Act of 1988 (Shorthold Tenancies) which deregulated the private rented sector. The new legislation will to some extent re-regulate the market and will considerably reset the relationship between landlords and tenants in favour of the latter.
The Bill will add more risk for investors, make the task of managing tenancies considerably more complex and expensive to administer than was the case under the assured shorthold regime.
Zoopla’s research shows that rental market conditions have been moving to rebalance supply and demand after 3 years of chronic undersupply with excess demand. However, says Zoopla, there’s still a “mismatch in supply and demand”, with in some cases 12 applicants chasing every vacant tenancy, with no sign that “this will rebalance anytime soon.” It means there will still be a continued upward pressure on rents.
The private rental market needs more supply to boost choice, thinks Zoopla, to help renters on lower-to-middle incomes who have struggled to keep pace with the 24% increase in rents for new lets seen over the last 3 years.
According to Zoopla, the average UK rent for a new let is now £1,284pcm, representing an increase of three per cent compared to last year. It’s the lowest rate of rental growth for three and a half years, being driven by worsening rental affordability rather than a major increase in the supply of homes to rent.
The average letting agent currently has 13 homes on its books for rent, a rise from a low of 10 in 2023 but still 22 per cent below the pre-pandemic average. Although many landlords have left the sector, rental stock levels have remained static at around 5.5m since 2016.
The latest ONS household cost of living data shows that living costs for private renters rose faster than any other group in 2024, a trend that underscores the economic conditions in the country.
The UK government aims to ensure all rental properties achieve a minimum EPC (Energy Performance Certificate) rating of C by 2030. This will require up to 50% of landlords in England to improve energy efficiency in some way to bee new standards - currently, private rented homes can be rented out if they meet EPC E.
In addition, the government is consulting on the need for private rented homes to have an energy rating of ‘A’, ‘B’ or ‘C’ before they can be let out from 2028. Almost half (45%) of rented homes require investment to get from a D rating to a C rating.
Nearly 20% of private rented homes are currently ‘E’, ‘F’ or ‘G’ rated. This means they would need considerable investment to bring them up to standard so they could be more at risk of being lost from the rental market, eroding available supply.
Richard Donnell, Executive Director at Zoopla has said:
“Rents are rising more slowly than average earnings, which will be welcome news for renters after three years where rents have risen rapidly. Affordability remains the primary constraint on rental inflation rather than increased supply and greater choice of homes for rent.
“We expect demand for rented homes to continue to exceed available supply in 2025, keeping a steady upward pressure on rents. The overall stock of private rented homes is unlikely to increase in size in the coming years due to rental reforms and policy changes impacting levels of new investment. It’s important that reforms in the private rented sector are designed and rolled out to minimise the negative impacts on available supply, which hit those with lower incomes hardest.
“We expect rents to increase by three to four per cent over 2025 as slower growth in large cities is offset by faster growth in more affordable markets.”
Allison Thompson, National Lettings Managing Director, Leaders Romans Group told Zoopla:
“The rental market remains under pressure, and while affordability challenges are influencing demand, the bigger concern is the long-term impact of upcoming rental reforms.
“The Renters (Rights) Bill, set to be introduced this year, has the potential to reduce the supply of rental homes, as landlords reconsider their position in the market. Without careful implementation, these changes could exacerbate existing shortages, ultimately putting further upward pressure on rents. Encouraging investment in the private rental sector is crucial to maintaining a balanced market and ensuring tenants have access to a stable supply of homes.”
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