The recent rise in new let rental prices in the UK, which have risen by almost a fifth (18%) over the past two years, appears to be cooling off, but price inflation in the rental market could still mean an average rise of 13% over the next three years.
This is according to a new study by the think tank Resolution Foundation, which predicts that rising rental costs will continue to rise faster than wages.
The study found that the demographic makeup of renters is changing – private renting is no longer just for 20-somethings. The proportion of poorer families with a 30-49-year-old head of household renting has almost tripled from just 11% in the mid-1990s to almost 30% in 2021-22.
However, recent data suggests that in certain parts of the UK, renting may be cheaper than buying as mortgage costs rise due to increased interest rates.
In certain parts of the UK, renting can be as much as £2,000 cheaper per year. The biggest savings over first-time buyers are made by renters in the East of England, where they save an average of £2,325 more annually, according to the Halifax Owning vs Renting Review published in March.
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Potential homeowners face higher mortgage rates and a shortage of homes on the market, driving up prices.
So why have rents increased?
According to the Resolution Foundation, the question of why rents exceed general inflation by so much is more complicated than it seems at first glance.
The theory that rising interest rates have driven up the cost of servicing buy-to-let mortgages – and are forcing landlords to pass those costs on to their tenants – ignores the fact that landlords’ ability to pass on higher costs is ultimately constrained by the wider rental market. If it were so easy for landlords to unilaterally decide to increase rents, they would likely have done so before 2022, the foundation says.
There have also been scare stories about interest rate rises and tighter regulation triggering a mass exodus of landlords from the private rented sector (PRS) and reducing the supply of available homes. However, the Foundation’s analysis of Bank of England research shows that there has only been a very modest fall in the PRS since mid-2019, equivalent to just 1% of the sector.
Instead, the Resolution Foundation says the main causes of the rise in private rents in the UK are a recovery from the pandemic and, more recently, rapidly rising wages. The foundation notes that rents tend to follow wages in the long term – and that average private rents relative to average income have remained roughly constant since 2000.
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However, pandemic-related disruptions to the rental market, during which evictions and foreclosures were halted, caused rents to fall to their lowest levels ever relative to income, almost 5% below what a long-term trend would suggest in early 2022. Part of the recent rise in rental prices is therefore a post-pandemic “correction” that is bringing the UK’s rent-to-income ratio back to its long-term trend.
This post-pandemic catching-up process has been reinforced by the historically high nominal wage growth of recent years: since the beginning of 2022, average wages have increased by 13%.
“With more families renting privately and staying there for longer, these rent increases are a bigger problem for the UK and require bolder solutions from policymakers,” said Cara Pacitti, senior economist at the Resolution Foundation. “Short-term solutions include regularly increasing housing benefit to support poorer families, and the ultimate long-term solution is simply to build more homes.”
In response to the investigation, the National Residential Landlords Association pointed out that while wage growth plays a role, a major reason for higher rents is the imbalance between supply and demand.
“With demand far exceeding available supply, there are an average of 15 potential tenants chasing each rental property – twice as many as before the pandemic,” said Ben Beadle, CEO of the NRLA.
“The impact of rising interest rates and tax increases should not be downplayed. 82% of buy-to-let loans are interest-only loans and the number of buy-to-let mortgages in arrears more than doubled in the last quarter of 2023 compared to the previous year. The Institute for Fiscal Studies has stated: ‘The harder landlords are taxed, the higher rents will be.'”
“Ultimately, a healthy rental market is one where there is a supply of rental housing to meet ever-increasing demand. Ministers must act to support the sector by developing growth-enhancing tax measures to achieve this,” he added.
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