"As things stand the growing unaffordability of renting is the only route to slower increases in rents"
- Richard Donnell - Zoopla
The latest Rental Market Report from Zoopla has revealed that rental growth for new lets currently stands at 5.4%, half the rate compared to a year ago but still higher than the growth in average earnings (5.1%). Average rents stand at £1,245 per month in July 2024, £63 per month higher than a year ago.
A lack of supply remains a major challenge for renters due to low levels of new investment by private landlords. The number of homes for rent is up by almost a fifth on last year off a low base, but the number of homes for rent is 24% below the pre-pandemic average.
Whilst rental demand has declined over the last year as one-off pandemic factors fade, mortgage rates fall and tighter visa rules reduce migration for study and work, there are still 21 people competing for every rental property, more than double pre-pandemic levels. This explains the continued impetus for rental inflation.
Risk of budget tax changes compounding supply problems
A lack of new investment in private rented homes has created a scarcity of homes for rent, compounding the strong growth in rents over the last 3 years (+30%). Increasing the supply of homes for rent is essential to help alleviate the scale of rent rises in the face of sustained demand.
The data shows a steady flow of landlords selling homes since 2016. Over 1 in 10 homes for sale on Zoopla (12.5% in July) were formerly rented. Higher mortgage rates have acted as an additional catalyst for landlord sales over the last two years on top of tax and regulatory changes dating back to 2016.
Renters Rights Bill
The Government’s new proposals for rental reforms as set out in the Renters Rights Bill, are already factored into many landlord decisions on whether to exit or remain in the market.
However, speculation over tax changes in the autumn budget that might impact landlords, may well result in an increase in sales of rented homes, further eroding supply for renters and pushing rents higher.
The lead time to complete a property sale runs to over 20 weeks which means it is too late to start now in the hope of completing before the Budget. However, a delay in any changes to taxation that impact landlords could result in more landlord sales in the short term.
Rents rise the most in affordable areas adjacent to large cities
The slowdown in UK rental growth is being driven by much lower growth in London (2.5%) and a slowdown in other major UK cities (5.8%). Rents are rising at an above average level across much of the rest of the UK, covering smaller cities and towns where rental costs are lower and offer better value for money. Some of the fastest rent rises are in affordable areas adjacent to these larger cities with six postal areas registering 10% or above annual rental growth.
In Scotland, Kilmarnock (13%) and Kirkaldy (12%) have recorded the highest increase in rents which are well below (25-35%) the average rent in Glasgow. Rent controls in Scotland have also played a role in exacerbating rent rises.
Across England, rents have continued to rise quickly in Wolverhampton (12%), Oldham (11%), Darlington (10%) and Walsall (10%), all areas adjacent to large cities with higher renters or well-connected for transport and access to cities further afield.
Supply/demand imbalance to remain into 2025
The demand for rented housing has slowed as one off pandemic factors start to fade and lower mortgage rates help some renters buy their first home. Changes to visa rules appear likely to reduce migration for study and work. Despite a softening labour market, rental demand is likely to run at above-average levels for the remainder of 2024, with rents expected to be 3 to 4% higher by the end of 2024.
The unaffordability of homeownership will continue to support demand for renting, especially across southern England where a significant number of workers can not afford to buy. A lack of meaningful growth in the supply of affordable housing means the private rented sector will continue to meet demand from those on lower incomes, further adding to overall demand.
Richard Donnell, Executive Director at Zoopla said: “The slowdown in rental inflation is being drawn out by a lack of homes for rent and continued strong demand, driven by the unaffordability of home ownership. Rental inflation is slowing in some major cities where rents are high but they are still increasing quickly in more affordable areas.
"Any new policy or tax changes that result in a reduction in supply will simply push rents higher hitting low-income renters hardest. It is essential policymakers focus on growing the stock of homes for rent as the primary route to slowing rental inflation and improving choices for renters. As things stand the growing unaffordability of renting is the only route to slower increases in rents.”
Director of Benham and Reeves, Marc von Grundherr, commented: “There remains an incredibly high demand for good rental accommodation and we simply don’t have the supply reaching the market to satisfy this demand.
“As a result, properties are being let at an extremely quick pace and this supply and demand imbalance is driving rental values ever higher.
“Unfortunately, this is a problem that looks set to persist, with the government introducing the Right to Rent bill this week, with tax changes also expected in the Autumn Statement, both of which are likely to deter landlord investment.
“In doing so, the level of quality rental accommodation is only likely to reduce further and whilst the landlord exodus may be somewhat exaggerated, we’re already in need of more homes at present and so any further reductions in stock will only cause the rental crisis to worsen."
Tom Bill, head of UK residential research at Knight Frank commented: “Ensuring tenants feel more secure in rented property is a welcome idea but unless new legislation is introduced in a considered way, there may be unintended consequences. If enough landlords decide the new rules are too punitive and sell, a lower supply of rental property will lead to higher rents, which would be bad news for tenants.”
Adam Jennings, head of lettings at Chestertons, says: “London’s rental market is notoriously competitive and we register numerous tenant enquiries per listing. With some landlords deciding to sell up amid tax changes and the Renters’ Rights Bill, the number of available rental properties is likely to see a slight decrease over the coming months.
"Although this dip will unlikely be permanent, it will result in an even more concentrated level of tenant demand per available property that will trigger rents to go up further. Tenants are advised to keep their fingers on the pulse of the market and remain in regular contact with their chosen estate agent to heighten their chances of securing their desired property.”
