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The typical economic misery index is created by adding the unemployment rate to the inflation rate.

For UK tenants the following may be more appropriate:

Or this:

Or (only Ingerland, sorry) this:

While many (mainly younger) people whose tenancy is tied to the start of the university semester are preparing for rents to rise sharply again – or are lowering their expectations – many are asking themselves one question: will rents soon be lower?

No. Okay, so, most likely not.

How about this instead: Will rents soon stop rising so quickly?

Maybe, says Sanjay Raja of Deutsche Bank:

There is reason to believe that rent inflation will ease over the rest of the year.

First, detailed data from RICS suggests that tenant demand for properties has slowed significantly since the start of the pandemic. In fact, rental demand slipped into negative territory at the end of last year and remains well below its long-term average. New landlord orders have also begun to show signs of improvement in recent quarters. Although still below normal levels, we could see a rebound in new orders by the second half of 2024, which would absorb some of the “excess demand” in the market.

Second, demand for rental properties has increased. According to the Bank of England’s survey of lending conditions, lenders have started to increase their expectations for buy-to-let mortgages, with data for the first half of 2024 looking quite good. Expectations for the future also point to a further increase in demand for buy-to-let mortgages. The Building Society Association reported the sixth largest increase in the number of investors seeking buy-to-let properties in a single quarter.

Third, several property sources suggest a slowdown in rental price inflation. For one, HomeLet’s data shows that annual price inflation is declining after peaking at over 11% year-on-year in late 2023 and is currently closer to 5% year-on-year. Zoopla’s own rental market report suggests prices are at 6.6% year-on-year from June 2024 (after peaking at 16% in Q4 2024), but rents for new lettings are expected to “grow more slowly this year”. A similar view is taken by Rightmove, which found that rental price inflation has reached 6.8% year-on-year, slowing from its peak of 16% in recent years. The ONS’ own survey of public opinion and social trends has also pointed to a moderation in the mortgage/rent increases experienced by households over the last month (July marked the lowest we’ve seen since February 2024). And finally, RICS’s rental forecasts for the next three months suggest a moderation in price inflation. Rent expectations have fallen from their post-pandemic peak of almost +65 to now +38. While they are not quite back to pre-pandemic levels, the data does suggest some disinflation in the future.

(Unfortunately, disinflation – a slowdown in price increases – is not the same as deflation, where prices actually fall.)

The other argument for normalising rent increases is that this would be, well, normal: “Rents ultimately tend to follow overall inflation – with a lag,” notes Raja:

So far, the rise in rent inflation has been linear – and partly due to methodological changes in the way private rents are collected. But as inflation normalises, private rent inflation will eventually normalise too. In fact, there have only been two periods in the last two decades when the CPI for private rents was above the headline CPI (one between 2014 and 2016 and one now). These are anomalies rather than the rule. With the wedge between private rents and headline CPI now at 5.6 percentage points, we expect a rapid correction over the next year or so.

If rent inflation Is slowly and then steadily progressing, it is worth examining the mechanisms in more detail why.

Of course, in theory, buyers set the price in the rental market, but it is not the same as buying chocolate or a new laptop: most renters have no choice between renting or not renting.

In addition, initiating the rental process comes under considerable pressure – households are often formed late (especially at this time of year, we imagine), the apartment search can be enormously time-consuming and the process is fraught with information asymmetries.

This gives landlords a lot of power, even though many protest against it. If they maneuver themselves into a vicious cycle of rent increases, there is not much the tenants can do about it.

That’s great for the Bank of England, whose rate-setters seem to have realised that renters are a useful tool for transmitting monetary policy. By raising interest rates in recent years, they have pushed up the cost of mortgages. Landlords have evidently been able to pass those increases on to renters – around a fifth of the population, a fifth who tend to be younger and poorer.

By the way, here is the latest assessment of the BoE Monetary Policy Committee on rents, from the August Monetary Policy Report:

Demand for rental properties continues to cool, although supply remains limited. Rent inflation has slowed, and some estate agents are reporting an increase in rent arrears.

As we’ve mentioned in a few articles, the structure of the modern UK mortgage market – dominated by 5- and 2-year fixed rate products – effectively creates delays in the transfer process: costs only rise when it’s time to renew the product. Even assuming rates continue to fall from now on, that means people will have to pay a higher interest rate for several more years when they renew. That would mean a lot more rental inflation has to filter through. So if that’s not the case, why not?

Greed, perhaps. From our perspective, there are three possible paths:

1) From here on, rent increases stabilize, suggesting that many landlords simply raised their prices to reflect market conditions before actually seeing an increase in their own costs. Good work if you can get it.
2) Rent inflation remains high relative to inflation and wage growth, suggesting landlords will continue to face large mortgage increases and pass them on as their fixed rates expire.
3) The pressure on tenants and supply is too great, prices are stagnating or even falling.

We firmly believe that 1) is the most likely path, which suggests that many landlords have opportunistically used the inflationary environment as cover for increased income even though they have not yet seen mortgage increases. That’s an uncomfortable consideration for renters, but much less concerning than 2). As for 3)… maybe. Probably not. Sorry.

While the UK is currently entering what may be the slowest austerity cycle in its history, higher rental costs are likely to persist.

Further reading
— Andrew Bailey against the tenants?