"Renters continue to face a relentless increase in rents, compounding wider cost of living pressures and making home moving decisions ever more challenging, especially for singles and those on lower incomes"
Rents continue to register double-digit growth for the 15th month in a row. Seasonal factors contributed to the annual rate of inflation slowing to 10.4% from a recent high of 12% in August 2022.
Zoopla says that an ongoing chronic imbalance between supply and demand has continued to drive up rents across all parts of the UK and is likely to continue into H2 2023 as we approach the usual seasonal upturn in demand over the summer and into the autumn.
With little prospect of increased supply, the growing unaffordability of renting will start to act as a drag on rental inflation. Rental growth is expected to ease towards 8% by the year-end. However, this is still above earnings growth. The impact of higher rents is not uniform with those on low incomes bearing the brunt, with increasing signs of stress.
UK rents have been growing faster than earnings for the last 21 months, since October 2021. This has pushed the proportion of gross earnings spent on rent to its highest level for a decade. Average UK rents account for 28.3% of average pre-tax earnings1 versus a 10-year average of 27%.
Rental affordability is currently at its worst for a decade in seven of the 12 regions of the UK. In another four, earnings spent on rent are within 2% of the last decade's high. While renting in London is the most expensive of all regions (averaging 40% of gross earnings), it is still below the peak of 43% reached in September 2015.
The longer rents rise faster than earnings, the greater the affordability pressures on renters, ultimately impacting demand and the pace of rental growth.
Supply and demand disparity continues to be the driving force behind higher rents
Rental inflation will only slow if we were to see a material increase in supply or weaker demand. The latter seems unlikely given rising mortgage rates impacting first-time buyers, the strength of the labour market, high immigration and the upcoming busiest period for rental demand – between July and September.
The level of homes for rent remains stuck 20-40% below pre-pandemic levels in most regions. This means more renters chasing fewer homes, adding extra impetus to rental inflation.
Rental home supply unlikely to improve in H2 2023
We do not see a situation where rental supply is likely to expand enough to moderate rental inflation over the rest of 2023. This would have to be driven by an increase in new investment from corporate and private landlords. A sharp slowdown in the sales market could also boost supply. It would mean fewer landlord sales and more owners pushed to renting out homes they are unable to sell.
Higher borrowing costs are hitting the business plans of new investors, slowing the pace of new investment. The impact of higher mortgage rates on the sales market will take a few months to feed through and would require mortgage rates to remain elevated at over 5.5% for much of the summer. This would deliver some support for rental supply in H2, but not enough to close the gap to pre-pandemic levels.
Steady flow of landlords selling, but no exodus on the horizon
A worsening in supply and talk of an exodus of landlords is being somewhat overdone, according to Zoopla. Recent sales data shows a steady, constant flow of private landlords selling up – this has been the case since 2018 but it's not accelerating.
At the same time, there remains continued new investment in rented homes, mainly from corporate and institutional landlords. The net result is no change in the number of private rented homes since 2016.
20-30% of landlords hit hardest by higher mortgage rates
Higher borrowing costs are hitting landlord finances where they have a mortgage. Zoopla estimate that just under two-fifths of landlords have no mortgage (38% of those who do have a mortgage, and a third have a loan-to-value (LTV) ratio of less than 50%.
Higher mortgage rates are unwelcome but more manageable for landlords at lower LTVs - there is greater free rental cash flow to 30% of landlords with the highest LTV mortgages that face the greatest squeeze on cash flow. This, in turn, increases the likelihood of a sale as they approach refinancing.
Landlord sales data reveals a clear concentration in London and the South East, accounting for 51% of landlord sales, regions with high capital values and low rental yields. This makes the economic situation tougher for landlords in the face of rising mortgage rates, as profits are reduced, especially for higher-rate taxpayers. The main option for landlords is to inject equity at the point of refinancing. However, it's an unattractive option for many with concerns over low yields and the risk of further price falls.
Signs of emerging stress for some renters
The rental market provides housing for households on a wide range of incomes. This means higher rents, on top of rising living costs, will hit some renters more than others, especially those on lower incomes.
A small, but growing number of renters are falling behind with their rent - a proportion that has doubled in the last six months from 4% to 8%. It seems likely these signs of stress will continue to increase for those on lower incomes. Landlords will need to support renters and manage rising arrears. Higher rents are manageable at his stage for many, but this will vary across markets.
With a low likelihood of a major boost in supply, it is affordability and demand side factors that will have the greatest impact on rent inflation. Zoopla expects that rental inflation will ease towards 8% this year, higher than expected with affordability pressures impacting rental inflation in the highest-value rental markets over the next 6-12 months. In more affordable areas there is still some headroom for rents to increase further.
Richard Donnell, Executive Director at Zoopla said: “Renters continue to face a relentless increase in rents, compounding wider cost of living pressures and making home moving decisions ever more challenging, especially for singles and those on lower incomes.
“The chronic imbalance between supply and demand continues to push rents higher but we expect increasingly stretched affordability will start to reduce the pace of rental growth into 2024.
“While there is concern over the impact of higher mortgage rates on those with mortgages, renters have already seen a £2,820 a year increase in rental costs over the last 5 years. Some renters are experiencing more stress from higher rents with a jump in those finding the rent difficult to pay.
“A proportion of landlords continue to sell but talk of an exodus is overstated. The real pressure of higher mortgage rates on landlords hits 20-30% with the highest loan-to-value mortgages where landlords may need to inject extra capital when they refinance or look to sell. Half of all landlord sales are in London and the South East where yields are lowest and the economics of being a landlord is toughest.”