UK RENTAL MARKET REPORT (2022-23)
Executive Summary
Rent averages 35% of a single persons earning
UK rents up 12% over 2022
Rental inflation at 12% is double wage inflation 6%
Rental demand is 46% above average (while supply lower)
Rental (un)affordability at highest level in 10 years
4-5% rental inflation expected 2023
There is a chronic supply/demand imbalance
The stock of homes for rent remains 38% below the 5-year average
Demand-side pressures are being exacerbated by rising mortgage rates limiting access to homeownership for first time buyers. (more people need to rent)
No sign of rent inflation slowing in the short term
Rising demand and a lack of supply mean rents are increasing quickly, up 12.1% over the last 12 months
This is an average increase of £117 per month or £1,400 a year
It is important to draw a distinction between rental inflation for new listings i.e. when the property becomes vacant and its rent is adjusted in line with the market, and rental inflation for all private rented homes.
1 in 4 renters move home each year and this group will experience (higher) rental inflation in line with new lettings. 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.
Actually slower than the growth in average earnings
More renters are staying put, to avoid higher rental payments when they move, and further compounding supply problems.
Rents are increasing fastest in the largest UK cities, led by London where rents are up 17% or £273 per month over the last 12 months ((Bristol (+12.9%)
Rental inflation will only slow if demand weakens or supply increases significantly, or if we see a combination of the two.
Structural undersupply of private rented homes
The stock of homes for rent has not grown in size since 2016, holding steady at c.5.5m homes
Rent is 35% of a single persons earnings.
Higher mortgage rates reduced the appeal of buy-to-let investing, limiting new purchase volumes which would have added to rental supply.
Proposed regulations and new rules on renting homes that are not at an Energy Efficiency rating of C or better from 2025 are likely to result in more private landlords selling up homes that are expensive to manage and retrofit reducing rental supply.
Potential modest improvement in rental supply as the sales market weakens. (Landlords looking to sell homes may now continue to rent them out.)
Rental supply will increase but not sufficiently to drive a material slowdown in rental inflation in isolation
Rental (un)affordability to hit demand and growth rate
Rental demand typically increases during economic uncertainly however the already very high costs of renting is what will influence a slow down in rental inflation this year.
Rental inflation in line with wage inflation is sustainable (and normal) however for over a year now rental inflation has been double wage inflation.
If this were to continue then rent as a percentage would go from 35% to 37%. This seems unsustainable so will likely lead to rental inflation slowing to 5% over 2023
Renters seek smaller homes or share
Increased rental costs is encouraging the sharing of homes
There is a particular squeeze on single earner households
(Space per private renter has decreased by 16% over last 20 years)
More young people choosing to stay living with parents
Renters are seeking smaller dwellings and 1 bed flats. A couple renting a 1 bed flat much more affordable than a 2 bedroom home.
Summary
Private rental market is critical part of UK housing market. Providing flexibility for those unwilling and unable to buy and adds flexibility to the labour market.
There has been a prolonged period of lower new investment in rented homes as well as landlords trimming down portfolios (in response to policy changes) this combined with increased demand means renters need to compromise more and pay more to find a home.
Rental demand will only increase so critical that policymakers encourage investment in the private rented sector as increased supply is ultimately the only way to achieve a more sustainable rental market
