Rents are rising in all parts of the UK. The steep hikes are due to a toxic combination of factors.
According to the Royal Institution of Chartered Surveyors (RICS), these include fewer properties being available to rent as landlords sell up due to increasing costs while rising interest rates on mortgages force more people to rent.
We drill down further into the reasons behind the rent rises, look at the picture across the country and get experts’ predictions for the market over the coming months and years.
Why are rent rises happening?
- A lack of properties on the market to rent or buy.
- The shortage of supply leads to higher demand and increased rent.
- Population growth adds to the demand.
- Higher interest rates make it harder for people to secure a mortgage, so they opt to rent.
- The cost-of-living crisis – inflation is forcing rents skywards as landlords face higher utility bills, increased mortgage costs, and other expenses which they pass onto tenants.
How much are rents rising by?
According to the RICS monthly survey, rents are increasing by an average of 4% and there’s no end in sight. The number of RICS members reporting growing tenant demand was at a five-month high in March 2023. The lack of homes is pushing up rents UK-wide, with supply and demand varying according to local area. RICS predicts a further rent increase of 4% due to the shortage of property. Rents for Houses in Multiple Occupation (HMOs), which typically include the cost of energy, heating and other bills have risen significantly, often above inflation.
The Office for National Statistics (ONS) found that rents increased by 4.7% in the year to February 2023, and over half of rental properties have seen a rent increase over the last year. ONS data into changes in private rental sector behaviour in England between February 2022 and February 2023, shows that 50.6% of privately rented properties in England saw a rent increase, up from 35% in February 2022.
London has seen the highest rent increase, while the lowest rises have been in the northwest. The average new rent increase in February 2023 was 9.7%, up from 7% in February 2022. Since early 2022, flats and maisonettes in London have seen the highest average percentage rent increase of all property types: London is experiencing the worst availability issues and the highest rental inflation at 15.2%.
Why is there more demand for rental properties?
We may be in a calmer property market, but there’s a shortage of houses for sale. While there are some house price reductions, first-time buyers who rent as they try to save for a deposit are being hit by rent increases, and higher interest rates on mortgages make it harder for them to get on the property ladder. The result is more people are renting as home ownership seems to get further away from them.
The rental market came under pressure in London when people moved back to work at the end of Covid 19; demand took off as the economy reopened in the spring of 2021. Another effect of the pandemic is that people dispersed, leading to increased demand for rental property in some other areas.
Rising population figures
Another key factor is the record high net immigration of people – 504,000 people have entered the UK to satisfy the jobs market. Numbers were boosted as the Government altered visa rules to attract skilled workers, added to by Ukrainian refugees, British Overseas Citizens moving here from Hong Kong, and more overseas students.
According to the BBC, the number of homes available to rent has fallen by a third over the past 18 months, resulting in an 11% rent increase. While the number of rental properties hasn’t changed much since 2016, the number of people wanting to rent has shot up: Zoopla figures show that demand is up by over 50% on normal levels.
The shortage of rental houses has been made worse by the trend for landlords to convert properties to short term lets – often Airbnb’s – which offer higher returns; according to Zoopla, there’s been a three-fold increase since 2019.
Lack of housebuilding
Adding to the crisis in the rental market, in April it was announced that the number of house-building schemes granted planning permission in England last year fell to its lowest level since 2006. The shortage of properties to rent has led the RICS to predict a 4% rise in rents over the next year; RICS chief economist Simon Rubensohn said the situation is being seen across the UK, and there’s no sign of a solution.
Nathan Emerson, CEO of Propertymark comments:
Due to increasing demand from prospective tenants against a backdrop of the undersupply of privately rented homes, rent prices have increased. Because of higher prices, some of the continued pressure on rents has eased slightly since the peak of last summer but it has by no means gone away. As is the case for many other homeowners, landlords’ costs have risen and continue to rise with increases to interest rates and the general cost of living. Alongside this, other financial obligations and regulatory hurdles are consistently presented for landlords, leaving little incentives for those wishing to enter or remain in the sector.
The UK Government must urgently look to incentivise investment, including in build-to-rent, as the private rented sector plays a crucial part in the nation’s housing crisis. An increase in the supply of homes is the only long-term solution to unaffordability in the rental market.
Signs that rent rises may be slowing
Zoopla’s UK rental market report for March 2023 states that rental inflation for new lets has slowed to 11.1%, from a high of 12.3% in mid-2022, when a strong labour market and record immigration drove demand. The supply of privately rented housing has grown just 1% since 2016. Zoopla executive director Richard Donnell said:
The demand for renting was incredibly strong in 2022, helping push rents up by 11%. Rents will continue to rise over 2023 but at a slower rate as demand moderates and affordability pressures start to bite harder on renters.
The number of enquiries for rental properties in estate agency branches peaked in the summer of 2022 at double the five-year average, according to Zoopla. This combined with a third fewer homes available for rent, drove demand by 250% above the five-year average. Demand is 10% higher than it was a year ago. Zoopla says that without more rental properties, rents will continue to rise ahead of incomes, and it expects the shortage of homes to rent to continue throughout 2023 as investors remain cautious.
The only positive signs are that a lot of corporate investment is going into build-to-rent schemes which will add to supply numbers in the mid to upper end of the market, and sellers could decide to rent out a property they can’t sell due to the quiet market. Given the UK’s weaker economic growth, rental demand is not expected to be as strong as in 2022, but is still above the five-year average, depending on the local area. Average rents are at or near a ten-year high when considered as a percentage of earnings, everywhere except in London. This is expected to slow the rate of rental growth to 4-5% by the end of the year.
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Tenants are struggling as landlords increase the rent
According to the Deposit Protection Service, a quarter of tenants are struggling to pay their rent; their survey of 2,000 tenants in England and Wales revealed 23% saying they are struggling; 51% are worried about future payments and 33% reported a rent increase over the past year. 62% of new tenants reported paying a higher current rent than they expected. Some said they have taken on extra work or jobs to meet payments. 45% of renters who have stayed put report a rent increase during the past year. 41% said it was hard to find a new fixed term tenancy due to rising rents, a lack of properties and high demand.
Extreme reference checks
Securing a place to rent is becoming like an exam in certain areas, with some agents and landlords asking for personal statements, CVs, character references and LinkedIn profiles. Would-be renters are being subjected to intense vetting procedures to sell themselves as ideal tenants. There are reports of tenants paying for several months’ rent in advance to secure a property, bidding above market rates, signing a yearly tenancy agreement or longer tenancy agreements.
According to Zoopla, rent on new tenancies is worth 35.6% of earnings, which is higher than figures seen in the 2015-16 housing boom. The acting director of Generation Rent, Dan Wilson Craw said:
It’s hard to know how rents can go up any further – affordability is already at the worst level we’ve seen for at least eight years and more people will fail letting agents’ affordability checks. Wider inflation will also start hitting what renters can budget for rent. But until supply improves, rents will stay high, and renters will make sacrifices on their housing situation: moving further away from their workplace or living in cramped accommodation.
We ultimately need more homes in the places people want to live, particularly social housing. One reason for resistance to new building projects is the lack of contribution to the wider community from large developers. The government is reforming how this works through the Infrastructure Levy. If it is done right, it should deliver enough infrastructure and social housing to win support and thereby unlock more developments. But by scrapping local building targets the government is putting all that at risk.
Many buy-to-let landlords are selling up as renting their properties has become less profitable due to rising interest rates on their mortgages, the loss of tax benefits and increasing red tape, including having to meet new Energy Performance Certificate (EPC) targets to make their properties eligible to rent out.
The Renters Reform Bill to be published this summer contains changes to the private rental sector, and landlords feel the government is targeting them indiscriminately, rather than just rogue landlords. Tenants who would have previously agreed to an Assured Tenancy or Assured Shorthold Tenancy will have to move to a periodic tenancy system when they sign a new tenancy agreement. Unlike a fixed term tenancy, a periodic tenancy runs for a set period, usually rolling on a week by week or month by month basis. The set period for how much notice tenants are required to give when leaving a property will increase from one month’s notice to two. The Section 21 means of evicting a tenant will be replaced with different grounds for gaining possession. A rent review clause will limit landlords’ ability to increase the rent to once a year, and a landlord must provide two months’ notice of an increased rent.
Rising house prices have also made it less appealing for buy-to-let landlords to increase their portfolios. Their departure from the market creates a lack of stock which in turn pushes up prices.
No change on the horizon
Our current dysfunctional housing market offers little real hope of seeing more houses to rent or buy. RICS surveyors predict not much changing over the medium term; there’s an expectation that interest rates may have peaked and they anticipate a slight rise in sales and house prices in around a year’s time.
Landlords are crucial now in providing good quality homes to rent. They need to feel that they can retain some control over their property through acceptable tenancy agreements, balanced with the need to respect tenants’ rights. The changes proposed in the Renters Reform Bill to give tenants increased security, periodic tenancies and the introduction of a new rent review clause, are continuing to spook them.
And of course, we need more houses of all types built. With an election in the offing, all parties are grappling with the issue and know that votes are there for the taking for whoever can come up with the most attractive-sounding housing policy.