Annual rental inflation for new lets (UK): +7.8%

Year-on-year change in rental demand: -20%

Rented homes in >£1,000pcm markets: 51%

Rental inflation in the UK has reached its lowest point in two years, dropping to 7.8% from 11% a year ago, marking a significant slowdown. The average monthly rent in the UK now stands at £1,223.

This moderation in rental inflation can be attributed to reduced demand and increasing affordability pressures, rather than a substantial increase in supply. Private landlords' levels of new investment remain subdued.

On average, each letting agent now has 12 properties available for rent, which is a fifth higher than last year but still 28% below the pre-pandemic average of 16. Rental demand has decreased by a fifth over the past year as temporary pandemic-related factors diminish, the job market cools, and lower mortgage rates encourage first-time buyers.

Despite the decrease, there are still more than 15 inquiries for every rental property available, down from over 40 inquiries in 2021 but double the pre-pandemic levels. While the supply-demand gap is narrowing, it remains significant.

Rental prices are expected to continue rising in 2024, albeit at a slower pace.

London has witnessed a significant deceleration in rental inflation, dropping to just 5.1% from 15.3% a year ago. The supply-demand balance in London has tightened notably, with demand decreasing by 30% compared to last year while available supply has increased by the same margin. Affordability challenges exacerbated by high rents in London are amplifying the slowdown in rental inflation.

In contrast, rental inflation across the rest of the UK remains largely consistent with the previous year despite weaker demand. While rental inflation is decelerating across all major cities, the extent is less pronounced than in London.

Scotland continues to experience the fastest rental price growth at 11.6%, remaining the sole region where rental inflation remains in double digits. The pace of inflation has moderated slightly due to subdued demand, primarily influenced by seasonal factors, yet lower rents are exerting less constraint on rental growth.

The years affected by the pandemic have resulted in a significant shift in rental rates, surging 29% higher since January 2020. Consequently, a substantial portion of rented properties has entered the higher rental brackets.

Examination of average rents based on local authority data indicates that more than half (51%) of rented homes are currently situated in markets where average rents surpass £1,000 per month. This marks nearly twice the proportion observed five years ago.

The proliferation of £1,000-per-month rental areas is no longer confined to the southern regions of England, as emerging city centre rental markets in regional areas witness growth. Corporate and institutional investments in rental properties have spurred the development of over 90,000 new 'build to rent' homes across the UK in recent years, with more projects underway. Additionally, housebuilders are beginning to sell properties to corporate landlords.

A fifth of rented properties in Scotland, the North West, East Midlands, and West Midlands are now situated in areas with rents exceeding £1,000 per month. Just three years ago, no local markets outside the south of England had rents surpassing this threshold. The North East stands as the sole region without markets surpassing this level, while Yorkshire and the Humber have only 4%.

Rents for new leases have outpaced average earnings growth for more than two years, starting from October 2021. Consequently, our gauge of rental affordability reached a peak of 29.5% of gross earnings by the end of 2023.

Between 2016 and 2021, rental affordability showed signs of improvement, fueled by minimal rental inflation. During this period, rents increased by only 4%, attributed to factors such as weaker demand post-Brexit, increased supply before 2016, and favourable access to homeownership due to low mortgage rates.

However, recent years have seen a reversal, characterized by robust demand, stagnant rental supply, and elevated mortgage rates, exacerbating challenges for first-time homebuyers. This imbalance between supply and demand has accelerated the rise in rents for new leases, outstripping earnings growth and leading to a decline in rental affordability.

Looking ahead, we anticipate a reduction in UK rental inflation to 5% over 2024, while economic forecasters expect average earnings growth to slow to just under 4%. This indicates that there is little immediate prospect for an improvement in rental affordability throughout 2024.

A sustained expansion in available rental supply could lead to a more rapid deceleration in rental inflation than currently anticipated. This might result in rent decreases in certain city centre areas, although any impact on the overall growth rate would likely be limited in 2024.

Persistently low levels of net new investment imply that rental supply will remain below average, thereby supporting headline rental inflation. The most effective approach to enhancing affordability is through boosting rental supply. While additional supply is expected from the new build sector, significant progress would require increased investment from private landlords. However, current indications suggest that this is unlikely, as ongoing adjustments to landlord portfolios due to higher mortgage rates and increasing regulation are anticipated to offset any rise in new investment in rental supply.

-28% - Number of rental properties per agent relative to pre-pandemic levels (2017-2019)

11.6% - Rental inflation in Scotland continues to exceed 10%

30% - Rent as a percentage of gross earnings end 2023

53% - Overall rent increase for renters in the last 6 months

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