MHHG estate agents

Rental inflation in the UK continues to rise for the 15th consecutive month, with rents registering double-digit growth. Despite seasonal factors contributing to a slight decrease in the annual rate of inflation to 10.4% from a recent high of 12% in August 2022, the ongoing chronic imbalance between supply and demand continues to push rents higher across all parts of the UK.

An ongoing chronic imbalance between supply and demand continues to push rents higher across all parts of the UK. This is set to continue into H2 2023 as we approach the usual seasonal upturn in demand over the summer and into the autumn. With little prospect of increased supply, the growing unaffordability of renting will start to act as a drag on rental inflation. We expect rental growth to slow towards 8% by the year end, still above earnings growth. The impact of higher rents is not uniform with those on low incomes bearing the brunt, with increasing signs of stress.

Rental affordability has reached its highest level for a decade, with UK rents growing faster than earnings for the last 21 months, since October 2021. Average UK rents account for 28.3% of average pre-tax earnings, versus a 10-year average of 27%. Rental affordability is currently at its worst for a decade in seven of the 12 regions of the UK. In another four, earnings spent on rent are within 2% of the last decades' high.

The entrenched supply/demand mismatch continues to push up rents, with the level of homes for rent remaining stuck 20-40% below prepandemic levels in most regions. This means more renters are chasing fewer homes, adding extra impetus to rental inflation. Rental inflation will only slow if we were to see a material increase in supply or weaker demand.

We do not see a situation where rental supply is likely to expand enough to moderate rental inflation over the rest of 2023. This would have to be driven by an increase in new investment from corporate and private landlords. A sharp slowdown in the sales market could also boost supply. It would mean fewer landlord sales and more owners pushed to renting out homes they are unable to sell. Higher borrowing costs are hitting the business plans of new investors, slowing the pace of new investment. The impact of higher mortgage rates on the sales market will take a few months to feed through and would require mortgage rates to remain elevated at over 5.5% for much of the summer. This would deliver some support for rental supply in H2, but not enough to close the gap to pre-pandemic levels.

Talk of landlord exodus overdone but some are selling. Our sales data continues to show a steady, constant flow of private landlords selling up - this has been the case since 2018 but its not accelerating. At the same time, there remains continued new investment in rented homes, mainly from corporate and institutional landlords. The net result is no change in the number of private rented homes since 2016.

Over 1 in 10 (11%) homes for sale in our database are former lettings. This percentage has been broadly consistent for the last 3 years as a proportion of private landlords rationalize their portfolios or exit the market in the face of tax changes and higher borrowing costs. We find that, pre-pandemic, half of these homes for sale returned to the rental market as unsold or bought by an investor. This limits the loss of rented homes from the private rented sector. More recently, the proportion returning has dropped to 30%. It means that more homes are lost from the rental market that can be replaced by the flow of new investment.

Higher borrowing costs are hitting landlord finances where they have a mortgage, with 20-30% of landlords with the highest LTV mortgages facing the greatest squeeze on cashflow. This, in turn, increases the likelihood of a sale as they approach refinancing. Our data on landlord sales shows a clear concentration in London and the South East, accounting for 51% of landlord sales. These regions have high capital values and low rental yields. This makes the economic situation tougher for landlords in the face of rising mortgage rates, as profits are reduced, especially for higher rate tax payers. The main option for landlords is to inject for equity at a point of refinancing. However, it's an unattractive option for many with concerns over low yields and the risk of further price falls.

The rental market provides housing for households on a wide range of incomes. This means higher rents, on top of rising living costs, will hit some renters more than others, especially those on lower incomes. Recent ONS Opinions and Lifestyle Survey data provides insight into the pressures on private and social renters and their ability to pay higher rents. The chart below compares the answers to three questions on rent rises and ability to meet rental payments and how this has changed from November 2022 to May 2023.

In conclusion, the rental inflation in the UK continues to rise, and the chronic imbalance between supply and demand continues to push rents higher across all regions. Rental affordability has reached its highest level for a decade, with UK rents growing faster than earnings for the last 21 months. While talk of a landlord exodus is overdone, some landlords are selling, and higher borrowing costs are hitting landlord finances where they have a mortgage. The rental market provides housing for households on a wide range of incomes, and higher rents, on top of rising living costs, will hit some renters more than others, especially those on lower incomes.