UK Rental Market Report (June 2023)
Join us as we take a look at the UK Rental Market for June 2023, and go over the overall market, new data on inflation and the factors behind recent changes.
UK new-let rental inflation per year: +10.4%
Rent (%) gross earnings: +28%
Landlord sales in London & South East: 51%
Summary
- For the 15th month running, rental inflation has exceeded 10%
- As we move into the busier summer season, when demand normally rises by up to 40%, the supply/demand gap isn't going anywhere
- Over the past 21 months, rents have increased more quickly than average incomes
- Rent as a percentage of income reached its greatest level in ten years
- Signs of increasing stress among tenants with low incomes
- Sales market weakness is projected to support rental demand in H2
- 20–30% of landlords with the highest loans are affected by higher mortgage rates
- In London and the South East, where yields are lowest and more equity is needed for refinancing, landlord sales are concentrated
Double-digit rental inflation persists
For the 15th consecutive month, rents continue to experience robust growth, registering double-digit increases. Although seasonal factors have contributed to a slight slowdown in the annual inflation rate, which now stands at 10.4% compared to a recent peak of 12% in August 2022.
The persistent and chronic imbalance between supply and demand remains the driving force behind escalating rents across all regions of the UK. This trend is expected to persist throughout the second half of 2023 as we approach the customary upturn in demand during the summer and autumn seasons.
Given the limited prospects for increased housing supply, the escalating unaffordability of renting will eventually exert downward pressure on rental inflation. We anticipate that rental growth will gradually decelerate towards 8% by the year-end, still surpassing earnings growth. However, it is important to note that the impact of rising rents is not uniform, as those with lower incomes bear the greatest burden, leading to increasing signs of financial strain.
Rental unaffordability hits a 10-year peak
Over the long term, rental costs typically align with earnings. However, in the UK, rents have outpaced earnings for the past 21 months, starting from October 2021. Consequently, the proportion of gross earnings dedicated to rent has reached its highest level in a decade. On average, UK rents now account for 28.3% of average pre-tax earnings, surpassing the 10-year average of 27%.
Currently, rental affordability is at its most challenging point in seven out of the 12 UK regions. In four additional regions, the portion of earnings spent on rent is within 2% of the highest level witnessed in the past decade. Although London remains the most expensive region for renters, with an average of 40% of gross earnings dedicated to rent, it still falls below the peak of 43% reached in September 2015.
As the disparity between rising rents and earnings persists, the strain on renters' affordability intensifies. Ultimately, this will begin to impact demand and the pace of rental growth.
The persistent disparity in supply and demand driving rent escalation
A slowdown in rental inflation can only be expected with a significant surge in housing supply or a decline in demand. However, the latter scenario seems improbable due to factors such as increasing mortgage rates affecting first-time buyers, a robust labour market, substantial immigration, and the upcoming peak rental demand period from July to September.
The availability of rental homes continues to lag behind pre-pandemic levels by 20-40% across the majority of regions. This imbalance results in amplified competition among renters for limited housing options, further intensifying the upward trajectory of rental inflation.
Limited improvement expected in rental housing supply during H2 2023
It is unlikely that we will witness a significant expansion in rental housing supply throughout the remainder of 2023. Achieving such an outcome would require a notable increase in new investments from both corporate entities and private landlords. Alternatively, a considerable slowdown in the sales market could contribute to increased supply if fewer landlords opt to sell their properties and instead choose to rent them out.
The escalating costs of borrowing are adversely affecting the business plans of potential new investors, thereby impeding the pace of new investments. The impact of higher mortgage rates on the sales market will take several months to manifest, and it would require sustained elevated rates of over 5.5% throughout the summer. While this scenario would provide some support to rental supply in H2, it would not be sufficient to bridge the gap to pre-pandemic levels.
Exaggeration of landlord exodus, but some divestments occurring
While claims of a mass exodus of landlords are somewhat overstated, it is worth noting that a steady stream of private landlords has been selling their properties since 2018, although there is no significant acceleration in this trend. On the other hand, there is ongoing investment in rental properties, predominantly from corporate and institutional landlords. As a result, there has been no significant change in the overall number of privately rented homes since 2016. The supply situation is expected to remain stable without any significant worsening.
Forecast
Considering the limited probability of a substantial increase in housing supply, the trajectory of rent inflation will primarily be influenced by affordability and demand-side factors.
Our projection indicates a slowdown in rental inflation to approximately 8% this year, which is slightly higher than our previous expectations. We anticipate that affordability pressures will gradually affect rental inflation in high-value rental markets within the next 6-12 months. However, in more affordable areas, there remains some potential for further rent increases.
13.5% - Rental inflation in London (Annual)
-33% - Homes available for rent compared to the 5-year average
30% - Overall rented homes for sale returning to the rental market
53% - Overall rent increase for renters in the last 6 months
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