The UK’s recent surge in new tenancy rental prices, which have risen by almost a fifth (18%) over the last two years, appears to be cooling. But price inflation in the rental market could still mean an average 13% increase over the next three years.
That’s according to a new study by think tank the Resolution Foundation, which predicts the increasing cost of renting will continue to outpace wage growth.
The study found that the demographic of renters is changing — private renting is no longer the preserve of those in their 20s. The proportion of poorer families headed by someone aged 30-49 that are renting has almost tripled from just 11% in the mid-1990s to nearly 30% in 2021-22.
Still, recent data suggests that renting may be cheaper than buying in certain parts of the UK, as mortgage costs mount due to elevated interest rates.
Renting can be up to £2,000 per year cheaper in certain parts of the UK, with renters making the biggest savings compared to first-time buyers in the East of England where they are an average £2,325 better off each year, according to the Halifax Owning vs Renting Review published in March.
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Prospective homeowners are being hit by higher mortgage rates and a lack of homes available on the market, which is driving up prices.
So why have rents gone up?
As for why rents are outpacing wider inflation so rabidly, the Resolution Foundation says it’s more complicated than it looks.
The theory that rising interest rates have pushed up the cost of servicing buy-to-let mortgages — forcing landlords to pass on these costs 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 choose to increase rents, they would likely have done so before 2022, says the Foundation.
There have also been scare stories about interest rate rises and tougher regulation sparking a mass exodus of landlords from the Private Rental Sector (PRS), 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 shrinking of the PRS since mid-2019, equivalent to just 1% of the sector.
Instead, the Resolution Foundation says the main causes of Britain’s private rents surge is a bounce-back from the pandemic and, more recently, fast rising wages. The Foundation notes that rents tend to track wages over the long-term — and that average private rents have remained roughly constant as a proportion of average earnings since 2000.
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However, the disruption caused to the rental market by the pandemic, during which evictions and repossessions were halted, meant that rent levels fell to their lowest level on record relative to earnings, and, by early 2022, were nearly 5% lower than what a long-term trend would suggest. Some of the recent surge in rental prices is therefore a post-pandemic “correction”, returning the UK’s rent-to-earnings ratio to its long-term trend.
This post-pandemic catch-up has been compounded by historically high nominal earnings growth in recent years, with average earnings rising by 13% since the beginning of 2022.
“With more families renting privately, and renting for longer too, these rent surges are a bigger problem for Britain, and require bolder solutions from policy makers,” said Cara Pacitti, senior economist at the Resolution Foundation. “Short-term solutions include regular uprating of Local Housing Allowance to support poorer families, and the ultimate longer-term solution is to simply build more homes.”
In response to the research, the National Residential Landlords Association pointed out that, while wage growth plays a role, a key driver to higher rents is the imbalance between supply and demand.
“With demand far outstripping available supply, there are an average of 15 prospective tenants chasing every rented property, double the pre-pandemic level,” said Ben Beadle, NRLA CEO.
“The impact of rising interest rates and tax increases should not be downplayed. 82% of buy-to-let loans are interest only and the number of buy-to-let mortgages in arrears more than doubled in the final quarter of 2023 compared to the year before. The Institute for Fiscal Studies has said that: ‘the more harshly that landlords are taxed, the higher rents will be’.”
“Ultimately, a healthy rental market is one in which there is a supply of rented housing to meet ever growing demand. Ministers need to act to support the sector by developing pro-growth tax measures to deliver this,” he added.
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