To some surprise, the lettings market has recovered more slowly from lockdown than the sales market. Although activity appears to be returning, the recovery in this market has been more U-shaped than V-shaped. Demand from tenants is down, partly as result of a leap in the number of first-time buyers – another thing that has surprised this year. Job insecurity means that other younger people are delaying a move out of the family home and into rental accommodation. At the same time, the number of homes to let has fallen. The reluctance of landlords to invest is lowering the supply of rental homeswhich may put a floor under rents at some point in the future.
There has been much government intervention in the form of mortgage repayment holidays for landlords and a ban on evicting tenants in arrears. This strategy has kept tenants in their homes. Nevertheless many have suffered a loss of earnings, affecting their ability to meet their rent in the coming months. The outlook for the rental market depends on whether tenants’ earnings start to pick up - and how many may lose their jobs. Until the direction of the economy becomes more clear, we expect rental growth to lag behind house price growth at least until 2022, with falls in rents this year and next. However, the market should stabilise towards the end of 2021. The decline in rents seems set to be deepest in London, where Airbnb and other short-term let properties have been switched to the long-term market. This has been prompted by a drop in the number o international students and tourists. There are also fewer well-paid overseas executives seeking temporary homes in London. As a result, we forecast a 3% fall in rents in the capital this year and a 1% fall in 2021.
But the easing of travel restrictions and the arrival of a vaccine should mean these tenants begin to return, allowing the London rental market to bounce back faster than elsewhere. By 2023, rents should be 3% higher than today. The drop in tenants’ incomes and unemployment will hit rental markets in other regions. But outside London, tenant demand is almost exclusively domestic and the supply of rental homes is also less plentiful. Higher income workers are less likely to have been affected by job cuts, which will support prime rents outside the capital where supply is short.
How will the size of the private rented sector in 2023 compare with today? In the wake of the last recession, which was sparked by the global financial crisis, home ownership rates tumbled. But this trend has been reversed, with more people in the 25-34 age group climbing onto the housing ladder. There is less competition than before from landlords for smaller properties - and some lenders have been reintroducing high loan-to-value mortgages. This means that we do not forecast that the sector will be larger in 2023 than today. More homes in build to rent blocks, funded by private institutions may become available. But this boost to supply, particularly outside of city centres, is likely to be offset by a reduction in the ranks of private landlords.