Rent increases slowing, but tenant demand is still outpacing supply
The latest available data shows that rent increases have been levelling off compared to the increases we’ve been witnessing over the last couple of years.
Rental price inflation was in the region of 10 percent last year according to Zoopla, whereas the property website is now showing increases slowing down to around 6.6percent. This is of course still a challenging increase for tenants when they are being asked to pay a UK average of £1,226, up 80 per month on last year.
There is evidence that landlords have been curbing their rent increases given a lack of affordability by tenants in the rental market – there is a limit to how much tenants can afford and in many cases this limit is being reached.
According to global data and business intelligence consultants Statista, UK wages grew by approximately six percent in March 2024. When bonus pay is included in the wage growth calculations, wages grew by 5.7 percent in nominal terms, but by only 1.7 percent in real terms (inflation adjusted).
So, with a sustained period of rent increases over the last few years, following the Covid pandemic and the Ukraine war induced cost-of-living crisis, the hike in inflation, and consequently the same with mortgage repayment rates, not only are tenants on their edge of their affordability, but many landlords with finance in place are also struggling to balance their income with their costs.
However, the high rent levels are underpinned by the high demand for rentals in many areas, but as earnings still lag the level of rent increases this should continue to put a brake on rental inflation. There is some evidence to show (provided by Zoopla data) that though landlords have been quitting the buy-to-let market, tenants have also been leaving, resulting in a noticeable drop off in demand over the last 12 months.
Despite this, a landlord exodus has resulted in a dwindling supply and an acute shortage – according to Zoopla there were 15 households chasing every available rental home in April 2024, a considerable increase from the 6 which existed before the Covid pandemic hit.
Zoopla recons that rents in London take on average 41 percent of a tenant’s earning, with average monthly rents now in the region of £2,100. These levels are now so high that they are typically shared among groups of tenants.
Stepping onto the housing ladder for first time, buying without parental support or exceptionally high earnings, has become ever more difficult – house prices have remained high despite a cost-of-living crisis, mortgages have become ever more unaffordable as interest rates have been hiked, and high rents coupled with low earning growth prevent saving for deposits.
Richard Donnell an executive director of Zoopla is quoted in The Times as saying:
“Rents continue to grow faster than average earnings, although the gap is much narrower than a year ago. Rental demand continues to run well ahead of available supply. The higher cost of home ownership and a lack of affordable homes means that the rented sector will continue to see continued demand on multiple fronts.”
Meanwhile, there is positivity on the house building front. Activity across the construction sector has increased to levels not seen since before the pandemic, indicated by the S&P Global purchasing manages’ index. A reading of 50 represents no growth but no decline, whereas the latest figure in May of 54.7 represents a sharp increase in growth, up from 53 the previous month.
This overall PMI figure, largely unexpected by the City, represents a positive sign for the economy as a whole, with the housing sector figure reaching 50.4, the first time it has breached the 50 datum index barrier since October 2022 and a steep rise in May from 47.6.
There’s growing confidence that the housing market has stabilised and “building good momentum” according to economics director, Andrew Harker at S&P Global Market Intelligence. Developers are demonstrating their confidence as they begin more projects.
The market had been rocked by the steep rise in interest rates following the mini-budget introduced by Liz Truss, which led to buyers putting purchases on hold while housebuilders put their own activities on hold.
Since then, we’ve seen a “steadying of the ship” under Jeremy Hunt, the Chancellor. Matthew Pointon, senior commercial real estate economist at consultants, Capital Economics, has said:
“Growing confidence that the [house] price correction is now over is spurring development and, as interest rates fall back over the second half of the year, that will give construction activity a further boost.”
Mortgage rates have been falling steadily over the past 12 months as inflation has come under control and the Bank of England is expected to lower its rates again, but only a couple of times this election year. These should fall from 5.25 percent to under 4 percent, which will probably put a floor under the decline in mortgage rates – the new normal it seems for interest rates.
All the signs are that the UK economy is now entering a minor growth phase having experienced a mild recession around the turn of the year.
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