Lettings

Boiling point

Like so much else, the cost of renting has been rising. The average rent in Great Britain passed the £1,200-a-month mark for the first time in October 2022. But the pace of increase is slowing. Annual growth, which reached a peak of 11.5% in May 2022, dropped to 7.9% in November 2022.

Since the arrival of Covid in January 2020, rents have increased by 19% across Great Britain, resulting in the average household paying an extra £2,351 each year in rent. Rental growth since January 2020 has exceeded that of the eight previous years.

All of this means that rent now accounts for 44% of the post-tax income of the average tenant household, against 42% in 2020 and 39% in 2012. Many tenants are trading down to cut their rental expenditure to its 2020 level. This usually involves moving to a home with fewer bedrooms or to a more affordable area.

To keep a lid on the situation, the Scottish government has introduced an eviction ban and a 0% cap on rental increases for tenants while they are in occupation. But a landlord can, through an application to a rent officer, seek to increase the rent by up to 3% to cover ‘prescribed property costs’ such as mortgage, service charges and insurance.

For some landlords though, recordbreaking rental growth may not be sufficient to cover the extra costs now being borne. Around half of landlords own a buy-to-let property with a mortgage. In November 2022, the average landlord nearing the end of a two-year fixed rate deal with a 75% loan-to-value mortgage will likely face a 151% increase in their mortgage payment. This equates to an extra £4,500 a year; rents would be required to rise by 33% to keep pace. 

A record number of buy-to-let limited companies are being set up as a consequence of rising costs. This arrangement allows landlords to offset mortgage interest from their tax bills. Although, rising rates won’t impact all investors equally. Higher mortgage rates have less impact on landlords who have borrowed a lower percentage of a value of a property, or who purchased that property some time ago.

There are no significant signs yet of landlords leaving the business. But landlords appear to be disposing of lower-yielding homes in favour of those that offer better returns. The good news is that mortgage rates are now coming down, following the surge in September and October 2022 in the wake of the mini-Budget.

So what next? The slackening of house price growth is set to bolster rental growth in the short-term. Higher mortgage rates will keep more would-be buyers in the rental market for longer. The repayments on a 90% loan-to-value (LTV) mortgage rose by 65% in the year to December 2022. It now costs £522 a month less to rent a home than to buy the same home with a 10% deposit.

As a result of such factors, we forecast that the average rent will rise by 5% this year, and by a further 5% in 2024, outpacing house price growth. But affordability will keep a lid on rents - to a degree.

Any increase in rental stock seems highly unlikely in the short-term. In November 2022, there were 39% fewer homes available to rent than in November 2019. While some landlords have been selling, more tenants have been staying put, resulting in fewer homes coming onto the market.

Some opportunistic investors may try to start snapping up “bargains” if house prices weaken, but they will be constrained by higher mortgage rates and the stress testing that coincides with those deals. Those landlords who do buy will need to put down bigger deposits, limiting buy-to-let to those with the deepest pockets.