Rental growth reached a record peak last year - and subsequently cooled. This was much to the relief of tenants who had experienced five years of typical rental growth in just 12 months.
Yet, despite the slowing in the pace of increase, the rise in the cost of moving into a newly rented home is still ahead of inflation. Tenants who have been occupying the same property for a while are also paying more when renewing their lease. This is because, often, their previous rents were below open market rates which have soared since 2021.
We expect the cooling of the tempo to continue, but the rents on both new contracts and contract renewals will still move ahead of house price growth and inflation in the short term.
There are unlikely to be any great differences between the trends in the North and the South. The North has accounted for most of the leap in the average rent since 2019. But the South seems set to play catchup. Affordability may still be an issue, but squeezed landlords are more likely to sell-up in these regions.
The longer-term annual historic rate of rental growth is 1.8%. But over the next few years, rental growth is likely to be twice this rate - and also above inflation.
Mortgage rates may have become cheaper, but they are still expensive for landlords who came into the business when the cost of borrowing was close to zero. The margins of these investors are being squeezed. But landlords who remortgaged to take substantial equity out of their property are particularly feeling the pinch.
"While economic drivers will have the biggest bearing on house prices, potentially it’s political risk which will shape the pace of rental growth."
Both groups will try - so far as they can - to pass on their higher overheads to tenants.
However, these eff orts may not always succeed, given the squeeze on tenants’ finances from past rent increases. As a result, we expect growth to cool a little in 2026 and 2027. This will also be true of new investors who could see their stamp duty bill double from April 2025.
The speed of future rental growth is likely to be increasingly constrained by the impact on tenants’ finances of the steep rises of past years, combined with broader cost of living pressures.
However, while economic drivers will have the biggest bearing on house prices, potentially it’s political risk which will shape the pace of rental growth. The Renters’ Rights Bill, a tougher version of the last government’s Renters’ Reform Bill, will probably lengthen the time it takes for landlords to repossess a property. The legislation may not make a material difference to the number of sales, but, over the longer term, more landlords who go through the possession process may opt to sell when their case ends.
The requirement for rental homes to achieve an energy performance certificate (EPC) A-C rating has returned, but with a 2030 deadline. A cost cap will be imposed, likely to be around £10,000, a sum that is more likely to dent the profits of Northern landlords in particular. At the same time, the EPC system is under review, meaning that the work needed to achieve a C rating may alter.
With the average age of a landlord close to 60, these older investors may bring forward a decision to quit the business, rather than tolerate diminished profits and extra regulation. Already, the number of such landlords selling up, while not large, has been consistently higher than the number of younger landlords embarking on buy-to-let. This is exacerbating the supply issue.
Rents are now much higher than they were, and mortgage rates have come down more quickly than was predicted. This reduces some of the pain on those landlords who are now remortgaging, having enjoyed ultra-low rates (although many loan deals now come with hefty arrangement fees). But tenant demand could slacken, as buying becomes less expensive than renting thanks to lower mortgage rates.
"An asset over which you have control may become a more attractive prospect if the tax changes reduce confidence in long-term retirement saving in a pension fund."
Recent policy changes have been a disincentive to invest in buy-to-let. But Budget changes to the taxation of pensions and lower rates on deposit accounts could reverse this, particularly at a time when buy-to-let yields are set to continue rising. We forecast that rents will rise 17% between 2024 and the end of 2027, outpacing house price growth of 12.5%. An asset over which you have control may become a more attractive prospect if the tax changes reduce confidence in long-term retirement saving in a pension fund.
WHAT WILL THE RENTERS’ RIGHTS BILL MEAN FOR THE MARKET LONG TERM?
This legislation reflects the altered role of the private rented sector, which once catered for students and twenty-somethings starting out their careers, but now also serves families with children and retirees. These are groups which typically look to stay somewhere long-term.
Longer notice periods and greater security for tenants mean that there will be less mobility in the market. Also, tenants in their 30s and 40s tend to move less often than their younger counterparts. The average tenancy length will continue to creep up, with new properties to rent becoming more scarce.
For today’s tenants, the extra safeguards enshrined in the Renters' Rights Bill are likely to mostly be positive. But, in future, tenants, particularly those on lower incomes or in less secure jobs, could face difficulty finding a home to rent.
The extension to notice periods for tenants in arrears will make landlords more cautious about the wide selection of tenants. They will be less likely to take a chance on an individual whose finances do not quite meet the standard.
The gap between market rents and those paid by long-term tenants is also set to shrink. Landlords have previously been fairly relaxed about allowing the rents of good long-term tenants to drop below open market rates. But tenants will be able to appeal (at no cost) against any increase in rent at a First Tier Tribunal. This suggests landlords will be more wary about letting rents drop too far below open market rates.