Second round of rental growth - sitting tenants see rents rise

Tenants renewing their contracts are starting to see their rent catch up with prices on the open market.

Published under Buy-to-let and Research — May 2024
Second round of rental growth - sitting tenants see rents rise

Some tenants have enjoyed years of no or below-inflation rent increases. Their landlords were often content with a small gap opening up between the market rate for their home and what their tenant was paying. However, over the last two years, strong rental growth on the open market has meant that the gap between market rates and what some tenants were paying rose significantly.

Tenants fortunate enough to be protected from higher rents by their landlord or longer contracts are increasingly seeing their rents now rise. 88% of tenants saw their rent rise upon contract renewal in 2024, compared to 61% of landlords achieving higher rents when a new tenant moved in.

 
 

In percentage terms, tenants are now facing bigger rent increases when they renew their contract rather than moving home as their rents begin to catch up. Rental growth for newly let homes peaked at 12.0% in August 2023, with the pace of increases nearly halving since then to 6.4% during the year to April 2024. However, the average rent paid by a tenant renewing their contract rose by 8.3%.

THE GAP

Even so, a tenant renewing their contract is paying an average of £1,151 per month. This is 13.4% or £178 less per month than a tenant signing a new contract to move into a new home, which partly explains why fewer tenants are moving.

 
 

While the numbers may sound high, these renewal increases are only just starting to close the gap with rents on the open market that have been rising particularly quickly over the last 18 months.

Back in April 2018, the average tenant who moved into a new property paid just 1.1% (or £8 pcm) more than a tenant renewing their contract. Since then, open market rents have risen 38%, whilst rents on existing tenancies have risen 21%.

FEWER TENANT MOVES

The large gap between market rates and what many tenants are paying is a big disincentive for them to move unless they have to. With tenants finding themselves materially better off by staying put, the number of tenants moving home has fallen to levels last recorded during the pandemic when the country was partially locked down.

 
 

The English Housing Survey reports that in 2022/23, 15% fewer tenants moved home compared to the five-year average between 2015 and 2019 (1.01m vs 1.19m). Our analysis of the number of lets agreed more recently suggests that in 2023/24 the number of renters moving home will be around 17% below the pre-pandemic average, falling below one million moves.

LOSING A BEDROOM

Moving increasingly means getting less home for more money. Strong rental growth on the open market means it has typically taken 20 months for the average rent to rise by the equivalent cost of an extra bedroom.

This essentially means that tenants have lost a bedroom with the average one-bed now costing the same as the average two-bed did 20 months ago. The average two-bed rent has also risen to the level of the average three-bed rent 20 months ago.

When rental growth for newly let homes peaked late last year, it took just 14 months for rents to rise by the equivalent of a bedroom. This is the shortest period on record since the Hamptons lettings index began. This compares to an average of between 50 and 70 months pre-Covid when rental growth was generally running between 2% and 3%.

THE OUTLOOK

The annual pace of rental growth for newly let homes in Great Britain continued to slow in April, with growth falling from 6.7% in the year to March to 6.4% last month. However, rents edged up 0.8% month on month, the largest increase this year.

 
 

This suggests that we’re unlikely to see the pace of rental growth slow too much further. Rather, annual growth looks set to stabilise around the 6% mark, which is significantly higher than the 2.5% average annual growth rate recorded pre-Covid.

While time will eventually close the gap between what sitting and new tenants are paying, it may take longer if rental growth on the open market starts picking up again.

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Aneisha Beveridge

Head of Research

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