Demand for rental homes is at an unprecedented level, with the average rent for a new letting having increased by £117 per calendar month (pcm) since last year, to reach £1,078pcm – and accounting for 35% of the average income of a single earner.
According to Zoopla, which provided the data, this is the highest level in over a decade and is exacerbated by the chronic demand and supply imbalance with the stock of homes for rent down 38% in comparison to the five-year average and down 4% in comparison to last November.
In stark comparison, rental enquiries per letting agency branch are 46% above the five-year average with rental demand being further boosted by rising mortgage rates which is limiting access to homeownership for first-time buyers.
The gap in rental inflation between new lettings and all privately rented homes is also widening. For the 75% of renters that do not move each year, rental increases are much lower at 3.8% in the year to October 2022 – slower than the growth in average earnings. This gap is why a growing number of renters are renewing their rental properties and staying put to avoid rent hikes if they move – however, this trend is compounding the supply problems in the sector.
Looking ahead to 2023, if rental growth continues at the current rate of 12% – the proportion of earnings needed to pay rent would be stretched even higher to 37%. This is unlikely, however, with the growing unaffordability of renting likely to hit spending power with rental inflation slowing to +5% next year
Rents in cities race ahead
Rents are increasing fastest in the UK’s largest cities with rents up 17% or £273pcm in London over the past 12 months. This is also the case in other large regional cities including Manchester (+15.6%), Birmingham (+12.3%), Glasgow (+14.1%), Bristol (+12.9%) and Sheffield (+12.4%).
A key trend in all these cities is the demand/supply imbalance over the past year – underpinned by large student populations and the fact all these cities are major regional employers.
Rental growth is lagging in smaller cities with Hull, York, Oxford and Leicester recording slower growth of less than 8% although this level is still higher than the rate of earnings growth (6%).
Supply-side boost needed to moderate rents
More investment in supply is the primary route to moderating rental growth and boosting quality and choice for renters. This structural supply problem stems from economic and policy factors – the stock of homes for rent has not grown in size since 2016, holding steady at c.5.5m homes. This means more renters are having to consider a greater set of compromises when looking to secure a home.
Further proposed regulations and new rules on renting homes that are not at an energy efficiency rating of C or better from 2025 are good news for consumers – but likely to result in more private landlords selling properties that are expensive and will require more investment.
However, headwinds in the sales market will also play a role, as some landlords looking to sell their properties may now reassess and continue to rent them to tenants in the near term.
Wider structural issues in the rental market are evidenced by the continued increase in the number of adults aged 20-34 years staying at home (3.6m in 2021) rather than incurring rental payments to live independently. Policymakers need to encourage good landlords of all types and sizes to stay in the market and deliver much-needed supply. Increasing investment in the private rented sector is the only way to ease the affordability pressures on renters in the medium term and create a more sustainable rental market
Richard Donnell, executive director at Zoopla, said: “Renters are paying the price for low levels of new investment in private rented housing over the last six years. A chronic lack of supply is behind the rapid growth in rents which are increasingly unaffordable for the nation’s renters, especially single-person households and those on low incomes. Many are also staying put to avoid the worst of rent increases.
“Renters are having to adopt a range of strategies to deal with rising rents. We have seen a rapid increase in demand for 1 and 2-bed flats while some renters are now considering sharing a property to cover the cost of rent. Others may now need to stay at home with parents or relatives for longer until they can afford to rent privately.
“Only a big increase in investment in the sector will ease the pressure on affordability and boost consumer choice. In the short-term, we expect the growing unaffordability of renting to reduce rental increases in 2023 to 5%.”