Most landlords and tenants have never experienced a rise in rents like the surge of 2023. The 10.2% jump in the monthly average in Great Britain was equivalent to the combined increases recorded in the years between 2016 and mid-2020.
The average rent is now 34% higher than in January 2020, when the pandemic took hold. As a result, a tenant who makes a move to a new home is now paying an average of £343-a-month more.
"Would-be buyers will be forced to rent for longer, unless they have a large deposit"
Some attribute this trend to landlords selling up and leaving the business, so reducing the supply of rental homes. But the lions share has been caused by landlords passing on higher borrowing and other costs to tenants.
The stock of homes to let is beginning to rise, albeit from a very low base. There were 29% more rental homes on the market at the end of 2023 than at the same period of 2022. This boost to supply has been accompanied by an unwillingness among tenants to accede to what they regard as excessive rent increases.
These factors mean that the era of peak rental growth is probably coming to an end. We think the rises in rents will slow this year, although they are likely to remain well above the annual increases of 2-3% that were the pre-pandemic norm.
But, while landlords’ rental income may have significantly improved, those with a mortgage – 70% - will still be worse off because of the surge in their costs. As a result, it is unlikely that they will acquire new properties to alleviate the shortage.
Meanwhile, the end of an era of cheap money seems set to put downward pressure on the homeownership rate. Would-be buyers will be forced to rent for longer, unless they have a large deposit and so can take on a smaller mortgage.
In the four years after the global financial crisis of 2008-2009, an extra one million people, unable to afford higher mortgage payments, turned to renting. We forecast a repeat of this period of stretched affordability.
So what’s in store for 2024? The financial markets are now pricing in four base rate cuts which should mean further declines in mortgage rates. This will relieve some of the pressure on landlords who have been compelled to remortgage in past months, by helping to bring down rates. Lower mortgage rates should also alleviate the slowdown in tenants climbing onto the housing ladder.
"We think the rises in rents will slow this year, although they are likely to remain well above the annual increases of 2-3% that were the pre-pandemic norm"
We expect the rate of rental growth to moderate to around 7% this year, as landlords’ costs start to reduce. Less generous returns on deposit accounts may persuade some landlords looking for better yields to add to their property portfolios.
In future, we forecast that rental growth will stay above its pre-Covid levels, with a return to the near-zero interest rate policy improbable in the foreseeable future. Central banks will continue to seek to bear down on inflation.
Landlords also face a degree of political risk. The government will be keen to lessen the cost of living squeeze and so may implement measures that further add to landlords’ costs.
But while such measures may moderate tenants’ outgoings in the short term, they will send rents upwards in the medium-term.
