MHHG estate agents

The UK rental market has been characterized by a persistent supply-demand mismatch over the past three years, resulting in a substantial increase in rents for new lets. However, signs of a deceleration in rental growth are emerging, and the market is expected to undergo significant changes in the coming year.

Rental Growth Trends

1. Past Growth and Future Expectations:

UK rents for new lets have surged by a third, amounting to an average increase of £3,360 annually over the last three years.

Peak rental growth is now behind us, with expectations of a major deceleration in 2024 due to worsening affordability and slow improvements in supply.

2. Regional Variances:

London, being the most expensive rental market and contributing 30% of rental supply, is set to experience the most significant slowdown, with an anticipated growth rate of just +2% in December 2024.

The overall UK rental growth is expected to slow to +5%, down from the current 9.7%.

3. Regional Disparities:

Rental growth in London has dropped from 17% a year ago to 9%, reflecting affordability challenges.

Other regional cities are experiencing more resilient rental growth due to better affordability than in southern England.

Factors Driving Rental Demand

1. Recent Demand Drivers:

Rental demand has been significantly boosted over the past three years by factors such as the reopening of the economy post-pandemic, robust labor market conditions, higher mortgage rates making home ownership expensive, and increased immigration, especially among overseas students.

2. Weakening Demand:

Signs of a plateau in demand are emerging, as evidenced by a decline in the number of enquiries per home for rent.

Factors contributing to the weakening demand include the reduction of one-off pandemic impacts, slower employment and income growth, and rising first-time buyer numbers.

3. Demand Levels:

While UK rental demand is 11% lower year-on-year, it remains 32% above the 5-year average.

London's demand is down 20% year-on-year but remains above the 5-year average.

Supply-Demand Dynamics

1. Ongoing Imbalance:

The supply-demand imbalance in the rental market is expected to persist in 2024, albeit moving more toward balance compared to the past three years.

Asking rents are showing signs of "overshooting" in some areas, especially in London.

2. Asking Rent Reductions:

Asking rent reductions of over 5% are currently the highest in London, with 10% of rental listings affected in November 2023.

Nationally, 7% of rental listings are impacted, the highest in over 5 years, signaling resistance to higher rents.

3. Affordability Pressures:

Affordability pressures are evident, leading to reductions in asking rents, especially in the £1,000-£1,500 per month bracket.

The rental market is showing signs of cooling after a robust three-year period of growth. Rental growth in 2024 is expected to be restrained by a scarcity of supply, driven by low new investment, increased regulation, and higher mortgage rates.