Newly released data from Zoopla has revealed that COVID-19 has led to a firmly entrenched two-speed rental market with marked differences between the performance of rental prices in London and the rest of the UK.
The two-speed rental market becomes the norm
Changing work patterns and a lack of tourists mean average rents in London are down on average by -5.2% this year, falling to levels last seen in 2014. This fall in demand is being felt more acutely towards the centre of the capital however with rents still rising in some outer London boroughs such as Bexley (+3.8%), Havering (+3%) and Sutton (+2%).
Apart from Edinburgh, also a tourism hub which has seen a -1.6% decline with the shift from short-term to longer-term lets, the wider rental market is proving to be more resilient, enjoying growth of +1.7%. In particular, there is strong rental growth in many cities including Bristol +3.1%, Glasgow +2.4% and Cardiff +1.8%, as demand levels continue to outstrip supply.
These increases in rental prices are not being seen across the board, however. Manchester and Birmingham have just dipped into negative territory, at -0.1% and -0.5% respectively. There are larger declines in Coventry -2.5% and Reading -1.8% as some cities feel the impact of office workers continuing to work from home.
The demand/supply gap
Renter demand across the country is up +20% year on year and, with universities remaining open despite the impact of COVID-19, the student market is unlikely to have taken much of a hit.
This strong demand is also likely being maintained due to the squeeze on lending for potential first-time buyers, keeping them in the rental market for longer.
At the same time, supply remains constrained with levels of investment in buy to let still reduced following the changes to Stamp Duty (the additional 3% surcharge on second properties) and the wider tax regime introduced from 2016 onwards.
The experience of lockdown is causing renters to switch things up
With the experience of lockdown being repeated across England and with restrictions remaining in place across the rest of the UK, renters are showing increasing interest in larger properties, especially those that may have access to outside space.
The search for space, first seen in the sales market, is now being firmly replicated by renters. Zoopla’s top searches for rental properties include the terms gardens, parking, garages, balconies and pets, reflecting a need for outdoor space and freedom necessary to cope with lockdown. There is also evidence that the while the market as a whole is moving more quickly, the market for rented houses is moving more quickly than that for rented flats, reflecting this desire for more space among renters.
Muted earnings growth is beginning to have an impact
Average pay in the private sector fell in April and, with COVID-19 causing uncertainty and negative economic headwinds, this pressure on wages is unlikely to have relented over the summer. While earnings growth is forecast to pick up next year, the existing pressure on wages could cause a gradual slowing in rental growth across the UK outside of London in the months to come. That said, this market will still outperform London, particularly if there
Gráinne Gilmore, Zoopla’s Head of Research, comments: "The split in the rental market caused by COVID-19 has now crystallised and we are seeing the two-speed market firmly entrenched.
"For most of the UK, the demand/supply gap is underpinning moderate levels of rental growth. We haven’t seen the exodus of students from cities and, as more people are staying in the rental market given the squeeze on mortgage lending, higher levels of demand will continue to underpin rents. At the same time, however, muted earnings growth will start to limit the headroom for rental growth in some markets.
"The search for additional space, both indoor and outdoor, within the rental sector is also set to continue as the country goes through additional periods of lockdown.
Michael Cook, National Lettings MD at LRG, adds: "We have moved a huge amount of customers this quarter, which is largely due to pent-up demand from tenants. As some of the pandemic restrictions eased, there was a corresponding surge in enquiries from renters who had been restricted from moving. Changes to stamp duty also saw investors take advantage of purchasing new properties and increasing buy-to-let purchases. However, we’re still seeing a gap in supply and demand and the need for more homes is clear.
"At the same time, COVID has massively changed tenant priorities. Many now seek separate working spaces, in bigger homes with gardens – a demand that is now coming at a premium. This has changed the appetite for rental stock outside of London, which has outpaced that shown in the capital, as fewer people have needed to be in such close proximity to the office and instead turned to home working. We have also seen houses increase in demand over flats, with people looking to rent bigger properties for longer, which is, in turn, increasing average tenancy lengths.
"This trend is nothing new, as demand for family homes in the rental market has continued to rise over the last decade – and we expect this to continue given the challenges around first-time-buyers, particularly those with young families.
"As we approach the beginning of winter, the normal seasonal reduction in new applicant enquiries is still present. However, properties are still letting quickly, but with more sensitivity around prices in parts of the capital than other regions. With shorter days, as well the new lockdown, we anticipate customers taking advantage of agencies that offer a comprehensive virtual viewing platform to arrange property visits."
