The recent slowing in rental growth should be seen in context. Between December 2020 and December 2024, rents rose by 30% across Great Britain, outpacing average earnings. The average rent today is 35% higher than at end of 2019, costing the typical tenant an extra £4,214 each year.
The current 2.0% level of growth marks a return to the pre-pandemic era when the typical annual rise was 2%-3%. The slowdown in rental growth is partly due to base effects. Rents were growing at double-digit pace at the back end of 2023, which is why the change in rents in 2024 versus 2023 has cooled. Rental growth is likely to pick up pace again in 2025, outpacing inflation.
The rate of increase continues to be the most rapid in Scotland and the Midlands, where rents on newly let properties went up by 5.5% and 5.2%, respectively, in 2024. This compares with an annual fall of -0.2% in London, the location with the slowest growth last year, but where rents rose 11.4% in 2023. In the East of England and the South East, the increases were 1.2% and 2.0% respectively. It is possible, however, that this may reverse the medium term trend of fewer landlord purchases in the South and start to push up rents.
Tenants who are renewing their contracts after several years in a property may be facing larger rises, but these will diminish as the level of rents on such contracts shift closer to the market level.
The downward pressure on rents stems from an improvement in the supply of rental homes in all regions: in December 2024, there were 10% more homes available across Great Britain than in the same month of 2023, when stock levels were near rock bottom. However, there are strong signs that the recovery in stock levels has peaked. The number of homes on the market still stands 13% lower than during the same time in 2019, a figure which has trended downwards in more recent months and is likely to put pressure on rents.
Interest rate falls this year will mean less generous returns on deposit accounts, restoring the allure of buy-to-let. Increasingly larger tax bills and other costs, combined with historic rent rises, will be priced into yields which have been rising over the last few years. The average gross yield on a new buy-to-let purchase in England & Wales last year hit 7.1%, up from 6.1% in 2019.
Despite higher entry costs and tighter regulations, we think the number of landlords entering the sector will pick up. But these newcomers will be treading cautiously, focusing not only on stamp duty and the direction of interest rates, but also on changes to regulations, primarily the Renter’s Rights Bill, set to come into force during late summer.
"Interest rate falls this year will mean less generous returns on deposit accounts, restoring the allure of buy-to-let. "
This legislation rewrites the rules for tenants who will be watching to see if the new indefinite rolling contracts change their relationship with their landlord. For their part, landlords will be observing the practicalities of this new legislation: will they still be able to raise rents or regain possession of a property from a non-paying tenant? There will be much more work for the already overburdened courts of law. Our view is that landlords are likely to monitor market rents more closely, to avoid a widening gap between what their tenant is paying and the open market.
Against this background, higher rents mean that landlords are not leaving the business in droves. As the latest English Housing Survey shows, there has not been a significant sell-off , with the number of rental homes remaining almost unaltered since 2016. Institutional investors continue to broadly off set the departure of smaller landlords from the market.
IMPACT OF THE RISING STAMP DUTY SURCHARGE ON SECOND HOMES
The recent increase in stamp duty surcharge for landlords, from 3% to 5%, has not significantly deterred buy-to-let investments as initially anticipated. Despite the tax bill for a £300,000 rental property rising from £11,500 to £17,500 post-Budget, and set to increase further to £20,000 from April 2024, landlord purchases have remained relatively stable.
In November and December 2024, the first two months following the tax change, landlords acquired 11.0% of homes sold, slightly above the year's monthly average of 10.2%. This figure aligns with recent years' trends, although it remains well below the 2015 buy-to-let boom peak of 15.7%.
The higher surcharge is, however, influencing investment patterns. More landlords are now focusing on the Midlands and North, where lower property prices result in smaller tax bills. The North East, in particular, has seen an increase in landlord purchases, with 18.4% of homes changing hands in November 2024 bought by landlords, surpassing pre-surcharge levels. This region's appeal lies in its attractive gross rental yields, averaging 9.7% in 2024 compared to London's 5.7%, despite generally lower capital gains historically.
The government's decision to raise the surcharge aims to generate an additional £400 million in revenue, based on projections of only a modest decline in investor purchases. While immediate reactions support this view, the experience in Scotland, where investor purchases fell from 10.3% to 5.8% following the introduction of a more zealous surcharge, suggests a potentially different long-term outcome.
"Landlords are likely to monitor market rents more closely, to avoid a widening gap between what their tenant is paying and the open market. "