With less homes available for rent and rental prices being at a record high in relation to average incomes, we look at how this effects the market and what to expect in 2023.
- Rental homes a 38% below a five year average
- Demand is 46% higher for rental properties
- This imbalance has pushed rents to the highest seen for single income households.
- Average rent has increased by 12%, whilst income increased by 6%.
- Large cities such as London, Manchester and Glasgow have had the highest rental growth in the 2022.
- The South East and East of England are the most expensive regions for renters with strong employment, dense populations and students driving rents higher. On the other hand rent becomes more affordable as you move further north.
Rising rental demand and a lack of homes for rent have seen the average UK rent soar 12.1% in the year to October 2022.
And with wages rising just 6% in the last year, renting is now less affordable than at any time in the last decade.
Renters are paying an extra £117 per month on rent than they were this time last year, spending £1,078 per month on average. This adds £1,400 to their annual rental costs.
And it means the average UK renter is now having to spend 35% of their income on rent.
This is the highest proportion of wages renters across many regions of the UK have had to put towards rent in the last 10 years.
The only exceptions are London, the South East and East of England, where renters are spending a slightly smaller proportion on rent than they did in 2015-16.
Rental growth is much lower for renters who extend their tenancies and stay in the same property, than those who begin new tenancies.
For the 75% of renters who do not move each year, rental increases were a more manageable 3.8% in the year to October 2022, according to the Office for National Statistics.
Renters looking for smaller or shared homes in response to higher rents
Renters are increasingly seeking smaller homes, shown in a rise in demand for 1 and 2 bedroom flats and a drop in demand for houses.
Enquiries for 1 bedroom flats now account for 32% of all rental enquiries in the UK as renters look to reduce costs by downsizing.
There’s been a steady increase in house-sharing, with recent research from the Resolution Foundation finding that the space per private renter has dropped 16% over the last two decades.
While we don’t have further data to quantify the impact of house-sharing, we suspect more sharing in light of the cost-of-living crisis will support rental growth in many parts of the country over the coming months.
In London, where house-sharing is much more common, we expect the impact of sharing on growth has already been felt and it’ll continue to be the chronic supply/demand imbalance that pushes rents up.
What’s causing rents to keep rising?
A severe imbalance between the number of available rentals and the number of people looking for a home is causing this huge growth in rental rates.
The number of homes for rent is 38% lower than average over the last five years, and down 4% compared to last November.
The shortage can be put down to several economic and policy factors, like landlords selling up due to higher taxes or greater regulation.
In contrast, estate agencies are getting 46% more enquiries about rental homes than they would expect, based on enquiry levels over the last 5 years.
There are a number of things contributing to rental demand, including higher mortgage rates in the sales market and renters staying in tenancies for longer to avoid rent rises.
Rents rising fastest in London and major regional cities
It’ll come as no surprise to any London renter that the capital has seen the biggest rise in rents in the last year.
Rents in London are up 17% compared to a year ago, which works out to an extra £273 per month.
Other big regional cities are also seeing rents rise quickly, including Manchester (+15.6%), Glasgow (14.1%), Bristol (12.9%), Sheffield (12.4%) and Birmingham (+12.3%).
With strong employment and large student populations, the rental sectors in these cities are struggling to cater to the number of people who need a rental home.
What’s going to happen next?
These rises will be a growing concern for all renters, especially those on low incomes, as living costs continue to go up at the same time.
While we expect rates to keep rising in the short-term, rents rising faster than earnings is not sustainable in the long-term.
If rental growth were to continue at 12% during 2023, renters would need to put an even higher 37% of their earnings towards rent.
This is not feasible and the growing unaffordability of renting will help flatten the growth of rental rates. Along with an anticipated modest improvement in rental supply, we predict 2023 will end with 4 to 5% annual rental inflation.
The number of homes available to rent right now is nearly 40% below normal levels.
Yet demand for rental properties is surging at 46% above the five-year average.
With so many renters needing properties and so few out there available, the rental market is facing a chronic imbalance between supply and demand.
That, in turn, is pushing up prices on new lets as renters compete to secure properties.
In the last year alone, rents have risen 12.1%, that’s an average of £117 a month, or £1,400 a year.
This means the average single renter is now spending 35% of their income on rent.
That’s the highest proportion of earnings in the last 10 years.
What’s causing the shortage of rental properties?
1: Landlords selling off properties
The private rented sector has a structural supply problem stemming from economic and policy factors.
The stock of homes available for rent has not grown in size since 2016, holding steady at around 5.5m homes.
Over the last 7 years, we’ve seen private landlords selling up and taking advantage of the strong sales market in the face of higher taxes and greater regulation.
This reduction in privately available rented homes has been offset somewhat by corporate investors delivering ‘build-to-rent’ schemes.
But proposed regulations and new rules on renting homes that aren’t at an Energy Efficiency rating of C or above from 2025 are likely to result in more private landlords selling up, especially if they own homes that are expensive to manage and retrofit.
And this further loss of privately rented homes is likely to offset the positive impact of new investment in the build-to-rent sector.
2: Rising mortgage rates putting off would-be first-time buyers – and landlords
Rising mortgage rates are exacerbating demand levels, as would-be first-time buyers wait for stability to return to the housing market before climbing onto the ladder.
Similarly, investment landlords are also being put-off from buying properties while mortgage rates remain high.
The demand for rented homes is only going to rise in the medium term, so it’s important that policymakers encourage good landlords of all types and sizes to stay in the market and deliver much-needed supply.
Only by increasing investment in the private rented sector can we ease the affordability pressures on renters in the medium term and make for a more sustainable rental market.
How are renters coping with the shortage of homes?
Renters are increasingly making compromises to cope with rising rents and the shortage of homes available.
1: More renters are starting to share properties in a bid to lower costs
Recent research from the Resolution Foundation 2 found that there has been a steady increase in sharing, measured by the space per private renter, which has decreased by 16% over the last two decades.
2: Others are choosing to stay with their families for longer
Data from the Office for National Statistics shows a continued increase in the number of young adults aged 20-34 years staying at home (3.6m in 2021), rather than incurring rental payments to live independently.
3: And some are choosing to move to smaller properties
Our last report highlighted how renters are seeking smaller homes with an increase in demand for 1- and 2-bed flats and a reduction in the demand for houses.
Our latest data shows this trend is continuing with an acceleration in demand for 1-bed flats, which now account for 32% of rental enquiries across the UK.
Supply is starting to improve
There has been a modest increase in rental supply in recent weeks as the sales market weakens.
The average number of homes for rent per estate agency branch is now 10, up from a low of 7 at the end of September.
And we do expect to see a further modest improvement in rental supply in the coming months.
Landlords looking to sell homes may now continue to rent them out while uncertainty in the wider sales market persists.
However, the fact that renters are choosing not to move rather than face higher rents is compounding the supply issue for the market.
When will there be more properties available to rent?
Unfortunately, we’re not expecting to see any major improvement in supply over the next 12 months.
