The rate of rental growth has gained momentum across most markets in the last six months as post-pandemic demand surged back into city centre markets and the supply of properties for rent struggled to keep pace. The rise is asking rents has been particularly acute in the flats market in London.
This sharp growth comes after a period of moderate rental growth in most of the UK however, with growth outside London pegged at between 1% and 4% for much of the last decade.
According to data from Zoopla, cumulative UK rental growth since the start of 2016 totals 16%. When compared to average wages and CPI inflation, average UK rents have not kept pace since 2016.
Regional trends
There has been strong annual rental growth across most regions of the UK, ranging from 15.7% in London to 6% in Scotland. Despite the strong annual rental growth in London over the last year, it is the South West where average rents have risen most, up by £127 a month compared to March 2020. This equates to an additional 5% of average earnings in the region.
The chart below shows the dynamics in terms of supply and demand across the regions. However, it is notable that there isn’t a straight-line relationship when it comes to the gap between supply and demand and rental growth. Even in the East Midlands, where supply constraints are less pronounced than in London and the South West, there is still double-digit rental growth given the strength of demand. But it is likely, as demand levels normalise, the markets with less marked supply constraints will be the first to see a softening of rental growth rates – including the East Midlands, West Midlands and East of England.
Affordability
The sharp rise in rents has stretched affordability metrics, with the average rent now accounting for 37% of gross earnings for a single renter. Around a third of renters are single earners, according to the English Housing Survey. So for the majority of renters who live with partners or share accommodation, the proportion of gross earnings used for rent falls to 18.5% on average.
While rent accounts for 21% of joint income in Manchester, in the local authority of Copeland, which includes the towns of Whitehaven and Cleator Moor, average rent accounts for just 7% of average joint income.
As in the sales market, many renters will be centred in a location due to family, work or school. However, there will be a proportion of renters who are able to move to other markets in order to cut their rental outgoings.
Another way to do this is to stay put in their current rental property, as often tenants in situ can strike alternative rental deals with their landlord, especially landlords keen to avoid a void period on their property. Our data shows that the average tenancy length has been rising since 2017. While this would be expected during the pandemic, when moving was more challenging, there has been a tick up again since the end of the lockdowns.
The average time between rental listings coming to the market has risen by 5 months, from around 1 year in 2017 to 75 weeks in March 2022.
Outlook
UK rental growth is being driven by high rental demand and limited supply, trends that are more pronounced in city centres. The surge of post-pandemic pent-up demand will normalise through Q2 and Q3.
At the same time, stretched affordability will also start to put a limit on further rental growth although this may not apply at a similar level across the market. While renters with more disposable income can adjust their property choices in order to limit their rental payments, those at the more economic end of the market have less choice to do this and are most impacted by rental rises.
However, the lack of supply is a wider structural issue in the Private Rented Sector as buy to let landlords are not investing at the same pace as they were before tax changes which have been introduced since 2016. This will put a floor under rental growth.
Even so, in a market which has registered double-digit annual rental growth, landlords in local markets will find increased sensitivity to pricing among renters. Our data shows that, on average, tenants are staying put in their current properties for longer, which may be partly due to not wanting to move into a new rental property where a larger rent increase will be applied.
There is a question about rising interest rates and whether renters will feel the impact of rising mortgage rates for landlords. Most landlords will have fixed-rate mortgage deals, so this will not be happening across the whole market at once, but in these market conditions, local demand will determine whether landlords can pass on this increased cost, especially as living costs are rising.
Zoopla says they expect rents to continue to rise this year, but at a more modest pace, with UK rental growth excluding London at 4.5% by the end of the year, which is in line with independent forecasts for earnings growth for 2022. London rental growth is forecast to be running at around 3.5% by the end of the year.
Gráinne Gilmore, head of research at Zoopla, says: “High levels of demand amid constrained supply is still putting upward pressure on rents, but affordability pressures will mean an easing in rental price growth through the rest of 2022.”
Richard Davies, Chestertons’ Head of Lettings, says: “Tenants who secured property at a discounted rental rate during the pandemic are keen to hold on to this deal as long as possible, particularly in the face of rising living costs. With the return of office workers, international students and corporate tenants alike, London’s rental market has seen unprecedented demand that is outstripping supply. This has created an extremely competitive market for tenants and many have begun offering landlords more rent than they are asking in order to secure a property.”
