Why is the cost of renting so expensive right now?

The number of homes currently available for rent is nearly a third below the five year average.

This, coupled with demand for rental properties running at 51% above the five year average, is creating a major housing supply problem for renters – and has been doing so for quite some time.

However, a silver lining is beginning to emerge: demand for new rental properties is starting to come down – and is now 20% lower than this time last year.

Equally, the number of homes now available for rent is 20% higher than this time last year.

When will the cost of renting come down?

The cost of renting has been rising at such a rate that it’s outpaced the rate at which wages are rising for the last 22 months – and rents have now hit their worst affordability level in over a decade.

Rental inflation has been running in double digits for 18 months, meaning the average rent has increased by £110 per month over the last year – an annual increase of £1,320.

Over the last 3 years, rents for new lets are up by an average of £2,772 per year, compounding the cost of living for renters.

However, again, there is a glimmer of hope on the horizon, as rental inflation is now starting to come down.

This time last year, rental inflation was running at just over 12%. Today, it is running at 10% and by the end of the year, we believe it will begin to track at 9%.

In 2024, we expect rental inflation to slow to 5-6%.

What’s happening with rents across the UK?

What’s going on with rents in Scotland?

In Scotland, where a rent cap was introduced to prevent landlords from raising rents by more than 3% for tenants in situ, rents are rising fast.

A system designed to be fairer for tenants is creating issues when the property becomes vacant.

Landlords, unsure of how long a new tenancy might last, are charging the full market price for new lets, meaning rents in Scotland are now rising faster than the rest of the UK.

Our Executive Director – Research, Richard Donnell, says: ‘The introduction of rent controls in September 2022 is a key factor here.

‘Landlords are seeking to maximise the rent for new tenancies to cover increased costs and allow for the fact that future rent increases will be capped over the life of the tenancy.’

This means Scotland has now overtaken London in terms of rental inflation.

In Edinburgh and Dundee, rents are up 15.6%, while in Glasgow they are up 13.7%. In London, rents are up 12.4%.

What’s going on with rents across the UK?

Across the UK as a whole, the rental market is stuck in a state of low supply and high demand.

While growing the supply of rented homes available is a clear solution, higher borrowing costs are causing the number of new investments from landlords to fall – alongside the level of new homes being built.

‘New investment from corporate landlords via ‘build to rent’ is a bright spot, boosting supply in many city centres,’ says Donnell.

‘However, rental levels set by corporate landlords are above-average and not at a scale to impact the wider market.’

Renters in existing tenancies are also reluctant to move in a rising costs market, meaning fewer rental properties are becoming available.

This has led to the average letting agent now having just 10 rental properties on their books, compared to 16-17 before the pandemic.

Why is rental demand so high right now?

Rental demand is rising for three main reasons:

• Higher mortgage rates, preventing would-be first-time buyers from entering the housing market

• The strength of the labour market and job creation

• Record levels of immigration, particularly apparent a year ago as international borders re-opened with an influx of overseas students returning to study in the UK.

When mortgage rates hit 5.5%, repayments for a first-time buyer become more expensive than rental costs.

Unfortunately, the supply/demand imbalance doesn’t look set to ease in 2024. But the cost of renting cannot keep rising beyond what renters can afford – and it is this that will have the greatest impact on rental costs going forward.

‘Increasingly unaffordable rental costs should temper demand and lead to a reduction in the rate of growth, says Donnell.

‘However, the scale of the mis-match between supply and demand means that rental growth will reduce more slowly than might be expected.

‘If supply remains low then a weaker labour market, lower immigration and falling mortgage rates would all be needed to reduce demand to a level that would reduce rental growth back towards 5% per annum.’

How can I spend less on my rent each month?

To help cope with the increased cost of renting, renters are:

• Renting smaller properties

• Sharing homes

• Moving to more affordable areas

‘More renters sharing does reduce the cost per renter, but this comes at the personal expense of less private space,’ says Donnell.

‘It also supports headline rental values. Data from the Resolution Foundation found private renters have experienced a 16% reduction in floor space per person over the last 20 years.

‘In our view, sharing is supporting high rents in inner London where the reduction in floorspace per renter has been greatest.’

In fact, increased levels of sharing could be a key factor in rents continuing to rise above earnings across regional cities in the next 12-24 months.

Elsewhere, the rates at which rents are rising varies across the UK – and renters are now choosing more affordable areas to live in.

In London particularly, renters are heading to the suburbs to seek better value for money, causing rental prices in inner London to slow.

Will the cost of renting come down in 2024?

Rents for new lettings are expected to keep rising ahead of earnings growth in 2024.

Wages are projected to rise by 3.6% next year, while we expect rents to increase by 5-6%, due to the lack of supply and sustained higher mortgage rates.

Regional cities across the UK are likely to see the highest rental increases, apart from inner London, where affordability constraints are likely to slow rental inflation.

This inner London slowdown is significant, as it will act as a drag on UK rental inflation as a whole and may potentially halve it to more sustainable levels.