Over the past six months there has been unprecedented government intervention designed to give private tenants more security of tenure. Landlords have been able to take mortgage repayment ‘holidays’ and there has been a ban on evicting tenants in arrears.
These measures have undoubtedly kept tenants in their homes. But what lies ahead for landlords and tenants? The outlook for the rental market depends on how fast the economy can recover and whether it can make up lost ground.
We expect a modest fall in rents this year, with a similar decline in 2021. The pace of falls will level off by the end of 2021 and we expect rents to rise by 2.5% in 2022, keeping up with house price growth.
What are our reasons for this view? Research indicates that tenants’ incomes are more likely to have fallen than those of homeowners. The increase in first-time buyer numbers is also putting downward pressure on demand for rental accommodation. Younger people are living with their parents for longer, rather than flying the nest into a rental home. Around half of all people moving into the private rented sector are new households.
Rental growth will decelerate more sharply in London than anywhere else due to a combination of factors unique to this location. The decline may be most severe in prime central neighbourhoods. But there should be a relatively rapid bounce back.
In the capital, record numbers of short-let properties have been converted to long-term lets in response to the fall in tourism and the lower number of international students seeking accommodation. There is also less demand for corporate lets because fewer overseas executives are spending time in London.
In other regions, tenants will face rising job insecurity; some will be earning less. But the stock of rental properties is considerably lower than in London and tenant demand almost exclusively domestic. This lack of supply may serve to put a floor under rents.
Rental growth will remain concentrated across the Midlands and the North, where purchases by landlords remain at historically low levels.
During the last recession, the homeownership rate tumbled, increasing the clientele of the private rented sector. But this may not be the case in the current recession. Growth in the private rental sector has levelled off in the past few years because more people in the 25-34 year age group are climbing onto the housing ladder.
We argue that it is unlikely that the private rented sector will become larger over the period to 2023. We base this view on two factors. Lenders are
gradually reintroducing higher loan-to-value mortgage products which will limit demand. However low-interest rates will continue to mean returns from buy to let will outstrip cash in a savings account, supporting investment levels in the sector.
Any growth in build-to-rent, particularly outside of city centres, is likely to be offset by a decrease in the number of private landlords. Build-to-rent schemes are backed by financial institutions.