Rents to grow more than four times faster than house prices over the next four years

The lettings market is moving into the spotlight following the publication of forecasts from leading estate agency Hamptons indicating that rents are set to rise four times faster than house prices over the next four years.

This prediction will add to the pressure on government to address the problems facing the private rented sector on which five million households in the UK rely.

A combination of tax changes, interest rate rises, and regulatory reform has made buy-to-let less attractive, with the result that the average rent in Great Britain is set to rise by 8% this year.  Hamptons expects another upward move of 7% in 2024, with further rises of 5% in both 2025 and 2026.

By the end of 2026, the average rent in Great Britain will be 25% higher than it was at the end of 2022.  By contrast, the average house price will be only 5.5% above that level.

Catherine Westerling, head of lettings at Hamptons, says that these unprecedented conditions arise from what she calls “a perfect storm of circumstances.”  Tenant demand has surged, while there has been a sharp decline in the supply of rental homes.  Some landlords are leaving the industry in reaction to changes in legislation, tax reforms - and the steeper cost of borrowing.

Aneisha Beveridge, head of residential research at Hamptons, comments: “There’s a strong argument that the Bank of England’s quest to quash inflation by successive base rate hikes has hit the rental sector harder than any other part of the housing market.”

She continues: “Homeowners have been squeezed by increases in mortgage repayments.  But landlords’ ability to absorb higher rates is more limited because many rely on interest-only mortgages.  When the interest rate doubles, so do their repayments.”

Some landlords are passing on extra costs to tenants by raising rents.  But there are limits on how much households can afford, which means that other landlords are selling up and not being replaced.

Beveridge says: “The numbers no longer stack up for landlords who need to borrow heavily.  We expect mortgage rates to stabilise at a point below where they are today, but they will still be above the level to which landlords have grown accustomed over the last decade.”

Yet, while this may not seem the best moment to become a landlord, Westerling suggests that lower house price growth and above-inflation rental growth may present opportunities.

She comments: “As house price falls stabilise and mortgage rates decline in 2024, it could be the time for landlords to think about buying in London and the North.  This, combined with rising rents will result in higher yields, which are already well above where they were last year.  At Hamptons, we’re forecasting the start of a new housing cycle in 2025, with London leading the return to house price growth.”

Westerling adds: “We need good landlords more than ever - and I would like to see some incentivisation to keep them in the sector.”

Against the background of the Hamptons forecasts, there will be mounting focus on the advisability of loosening landlords’ tax regime.  The implications for tenants of the direction of rents are becoming difficult to ignore.