Market dynamics and the persistent rise in rents to meet the UK’s burgeoning demand
A recent report has elucidated that, notwithstanding a deceleration in the rapid escalation of rental prices witnessed over the preceding three years, the year 2024 is set to conclude with rental costs surpassing their initial levels. This trend is principally attributed to the inadequate expansion in the UK’s rental housing supply to meet the burgeoning demand.
Despite this, there has been a marginal improvement, with the average letting agent now managing 12 properties, marking a fifth more than the previous year. According to the report, this indicates a positive, albeit slow, shift in stock availability. Nonetheless, the inventory of available rental properties remains below the averages seen prior to the Covid-19 pandemic.
Financial implications for renters
The financial burden on renters has intensified, with over half of the privately rented properties now commanding monthly rents in excess of £1,000, elevating the national average to £1,223. This signifies a 7.8% increase compared to the preceding year, continuing the upward trajectory of rental costs.
However, this growth rate represents a deceleration from the 11% annual increase noted a year earlier, influenced by a cooling labour market, the diminishing impact of the pandemic and marginally improved mortgage rates for first-time purchasers.
Regional variations in rental trends
London’s rental market has experienced the most pronounced decline in prices over the last year, significantly influencing the overall UK rental averages. Excluding the capital from the equation reveals a steady state in rental prices across the UK, with certain regions such as the North East, South West, South East and East witnessing price increments over the past year.
Conversely, London’s annual rental growth fell from 15.3% to 5.1%, marking the lowest in the country and indicating a sharp deceleration, potentially as a consequence of the cost of living crisis.
Supply and demand disparities
The report highlights that the disparity between supply and demand has notably narrowed in London, with demand decreasing by 30% compared to the previous year, while the supply saw a corresponding increase. In the North West, however, rental price growth only marginally reduced, from 10.6% to 9.8%.
Despite an improvement in the number of rental homes available, the market still faces a 28% deficit in homes for rent per agent compared to the pre-pandemic average, underscoring the persistent shortage of rental housing.
The affordability crisis
When juxtaposed with average earnings, rental markets’ affordability has deteriorated as rents have surged. Between 2016 and 2021, rents rose by a mere 4%, attributed to subdued demand post-Brexit, an increase in supply prior to 2016 and more accessible homeownership due to low mortgage rates.
However, a resurgence in demand alongside rising mortgage rates, coupled with stagnant supply levels, has left many potential first-time buyers in the rental market, exacerbating the pressure on the already limited housing stock and fuelling further rent increases.
Towards a solution
The report unequivocally suggests that enhancing rental affordability necessitates expanding the rental supply. While new constructions will contribute to alleviating the shortage, a significant impact would require increased investment by private landlords.
This prospect appears bleak as higher mortgage rates and escalating regulations may deter new investments and lead to a rationalisation of existing landlord portfolios, potentially neutralising any gains in rental supply, the report concludes.
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Please note: this is a long term investment which you hope will generate rental income along the way and a profit when you sell the property, but bear in mind that if you need access to some cash, a property can take time to sell or remortgage. If house prices fall, you might not be able to sell for as much as you had hoped. You would have to make up the difference if the property sold for less than you owe – a risk that increases, the higher the percentage you borrow. If you sell for a profit, you may have to pay capital gains tax. Don’t forget that with a variable rate mortgage, your costs will rise if interest rates go up. This would eat into, or even wipe out, your income and profit. It is recommended that you also maintain access to emergency funds to cover your mortgage payments during ‘void periods’ that may arise whilst you have no tenant and the property is not let. Please also note: a mortgage is secured against your home or property. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
