Will the rental market ever cool off?

Posted on Monday, December 12, 2022

At LRG, we are currently seeing rental properties go within days and sometimes hours of being placed on the market. Rent is also increasing at a rapid rate, with the median average rent across the UK now at £971 per month. As the housing sales market is slowing, with prices dropping and mortgages being removed from the market, rent is high, and stock of rental property is in short supply. 

‘Uncertainty’ is now a term commonly used when describing the UK property market. This is partly due to the economic instability that occurs with frequently changing policies. A slightly new stance on regulation is expected with changes of premiership and the lack of confidence in the market.

While aiming to put the tenant front of mind and improve the quality of living for millions, the proposed Renters’ Reform Bill has inadvertently added further momentum to the ongoing reduction in rental stock. With added regulation and taxation, some landlords, have exited the market creating a gap in available housing and increasing rents.

To help landlords and tenants navigate the challenging six months ahead, here are our expectations on what we are likely to see happen in the rental market over the rest of 2022.

Four rental and letting forecasts we expect to see for the rest of 2022

Landlord churn will slow down

We have seen higher rates of landlords exiting the market this year, leaving a supply and demand imbalance. Some landlords have weighed up staying in the lettings market against increased regulation and decided it is better for them to exit. However, over the summer we started to see this process slow as house prices began to plateau, and yields increased. With a new government and a new set of economic challenges, that process is becoming even more pronounced, as it becomes harder to sell and to do so landlords wishing to exit will have to compromise at selling their property at a lower price than they would have achieved earlier in 2022.

The repercussions of the recent mini-budget are still sending ripples of uncertainty through the market, especially among first-time investors, who will be reticent to trust the stability of interest rates during the conveyancing process. Those landlords that have not kept their rent in line with the market are often surprised at the rent achieved when initiating a new tenancy, and this can often be the catalyst to remain in the market against a backdrop of lower capital values versus those seen in the summer.

Low-income tenants will feel the pinch this winter

Despite government support with Cost-of-Living Payments and current energy subsidies, rents continue to rise alongside inflation meaning many people across the country are likely to feel the squeeze during the cold season. Fuel costs, plus higher interest rates, in addition to higher living costs, generally will impact tenants, especially those on low incomes.

A recent government report on poverty in the UK showed that a 30% increase in the poverty rate is expected before 2025 and that currently, nearly 20% of working-age people in the UK can’t afford to save ten pounds per week. As rents rise, those on lower incomes will be impacted, including social housing tenants. Although this is not an area of our business, we keep a close eye on renter arrears as the trends identified are often tell-tale signs of what might spill over into the private rental market.

Short-term lets will make life harder for tenants

Many cultural factors have impacted a boom in short-term lettings over recent years, as those with disposable income and nomadic workstyles have opted for staycations and stints in Airbnb’s and holiday properties. Build-to-rent has also been a phenomenon, enabling investors to create modern, high-spec interiors for short-term residents.

One of the main features of the proposed Renters’ Reform Bill is to remove the option for landlords to lock tenants into long-term contracts. While the intention is to give more flexibility to tenants, particularly to students and people looking for short-term accommodation, it could have a negative impact in the long-term. With rents rising, many tenants are looking for security; to know they have a home for a set period of time, often years in many cases, at an affordable rate.

The focus on short-term lets removes this and, under the new Bill’s proposal, landlords looking to sell (the main reason for lack of rental availability) can achieve possession quicker than if they were committed to a two or three-year fixed tenancy. We are not sure this chimes with the narrative of the Bill to enable families to put down long-term roots.

The Renters’ Reform Bill will pass through parliament

It is now widely expected that the Renters’ Reform Bill will pass through parliament by the next election, despite contention over policies during the Truss administration. Areas the bill can address include fair and equal rights of landlords and tenants, as well as stipulating more accountability for rogue landlords.

The difficult marketplace created by mixed approaches and lack of proper enforcement to compliance and non-compliance can push ‘good’ landlords out of it completely, leaving tenants disenfranchised with rogues contributing to non-compliance but operating with relative impunity. One interesting stance from our new PM, Rishi Sunak, is that he wants to support local communities in their plans to build homes rather than promising ‘arbitrary, top-down’ targets for house building. This may further reduce the accessibility of homes to buy, while fuelling the rental market.

Although greater pressure is placed on landlords to meet compliance, the trend for landlords coming back to the marketplace will likely endure. This is partly because many people who once considered buying, are now looking to rent. The competition to rent high-quality flats is reflective of greater instability in the mortgage market, which will certainly continue as a new government is formed and as we navigate through what is likely to be a recession on the horizon. The gap in supply of flats and rental properties will only make them more desirable, creating a pronounced demand for hot rental property in the UK market.

Via @PropertyReporter