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Market Insight

Cooling rental growth
Spring 2024

The rent spiral is easing, but the pressure on tenants will continue against a backdrop of limited numbers of homes to let.

The average rent rose by 7.1% in the 12 months to February. This was the lowest annual rate of increase for 14 months – and the second time in six months that growth has been in single digits. Growth peaked at 12.0% in August 2023, decelerating to 10.2% in December and 8.3% in January.

The slackening in rental growth since August 2023 was primarily driven by London. The annual pace of increase in the capital fell from 17.1% to 6.1%, the slowest rate for two years. Only in Scotland and the East of England did rents continue recording double-digit rises.

So far this year, 61% of landlords in all regions received a higher rent on a new letting which compares with 81% during the same time in 2022 and 80% in 2023. This was in marked contrast to the pre-pandemic era. Between 2015 and 2019, 49% of landlords were able to secure a higher rent when re-letting their property, with rental growth at, or even below the rate of inflation.

It now appears that the summer of 2023 was the high watermark for rental growth which began to take off in December 2021 when interest rates were hiked for the first time.

For a period, landlords were able to raise rents to cover their higher borrowing costs. Landlords who owned smaller homes found it easiest to do so because tenants, hit by the soaring cost of living, were downsizing into cheaper properties. In 2023, 83% of one-bed homes were re-let at a higher price, compared to 67% of four-bed homes although this gap is now closing.

Towards the end of 2023, tenants’ finances became so stretched that, in many cases, they were not able to pay more. This has kept a cap on rental growth and in cash terms, monthly increases have been in double rather than triple figures.

" Rental growth is set to be stubbornly sticky, remaining above the rate of inflation for the rest of 2024"

Looking ahead, although mortgage rates are falling, rents will not be heading downwards. The wider squeeze on landlords arising from rental reforms is deterring new entrants to the buy-to-let business. Indeed, on the sales market, first-time buyers are now outnumbering buy-to-let investors 3 to 1.

There may be 30% more rental homes on the market than a year ago, yet the total stock of properties is still as much as 41% below the number available in 2019, and unlikely to return to that level in the foreseeable future.

As a result, rental growth is set to be stubbornly sticky, remaining above the rate of inflation for the rest of 2024.

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