MHHG estate agents

The UK rental market has experienced 18 months of double-digit rental inflation, with demand for rented homes slowing but supply remaining low. While demand is 20% lower than a year ago, it is still 51% above the 5-year average. The number of homes for rent has increased by 20% compared to last year but remains 30% below the average for this time of year.

Annual rental growth in the UK is currently at 10.5%, down from 12.1% a year ago. Average rents have increased by £110 per month over the last year, amounting to an annual increase of £1,320. Over the past 3 years, rents for new lets have risen by an average of £2,772 per year, adding to the cost-of-living pressures for renters.

Scotland has registered the highest rental growth in the UK, with annual rental inflation at 12.7%. This surpasses London as the area with the fastest rental growth. Rents for new lets in Scottish cities, particularly Edinburgh, Dundee, and Glasgow, have seen significant increases ranging from 13.7% to 15.6%. This growth can be attributed to the introduction of rent controls in September 2022, which capped rent increases for existing tenancies at 3% per year. Landlords are now seeking to maximize rent for new tenancies to cover increased costs and account for future capped rent increases.

The rental market in the UK continues to face a persistent supply/demand mismatch. While rental supply needs to grow to reduce rental growth, home building and net new investment by private landlords have been declining. Corporate landlords investing in "build-to-rent" properties have boosted supply in city centers, but their rental levels are above average and do not significantly impact the wider market. Many existing renters are also avoiding moving to avoid paying higher rent, further reducing available supply.

Demand for rented homes is driven by factors such as the strength of the labor market, job creation, and record levels of immigration. However, demand has decreased by 20% compared to a year ago, although it still remains high. Higher mortgage rates have also increased the cost of buying, keeping more potential buyers in the rented sector. The affordability of renting will play a crucial role in rental growth in the upcoming months.

Rental affordability has deteriorated, with rental costs outpacing earnings growth. Rental affordability is currently at its worst in over a decade, with the average rent as a percentage of gross earnings at 28.4%. While increasing rental costs should reduce demand and slow down rental growth, the supply/demand imbalance is expected to result in a slower reduction of rental growth than anticipated.

Renters are resorting to renting smaller homes, moving to cheaper areas, or sharing properties with other renters to reduce costs. While sharing reduces costs per renter, it also leads to less private space. Increased levels of sharing could contribute to rents continuing to rise above earnings across regional cities in the next 12-24 months.

Rental growth is shifting to more affordable areas, with expected growth ranging from 6% per annum in Brighton and Exeter to 15.6% in Edinburgh. Inner London is experiencing a slowdown in rental growth, with renters seeking better value for money in the outer London suburbs. Rental growth in inner London is expected to slow further due to expanding supply and affordability pressures.

Overall, rental growth is projected to end the year at over 9%, higher than earnings growth. Rental growth is expected to continue outpacing earnings growth in 2024 due to ongoing supply constraints and sustained higher mortgage rates. The forecast for UK rental growth in 2024 is 5-6%, with regional cities driving the growth. Rental inflation in inner London is expected to slow more quickly, potentially halving the UK rate of growth to more sustainable levels.