Why Rents Are Surging Beyond Inflation and House Price Growth.
The UK’s rental market is currently experiencing unprecedented turbulence, with rents surging beyond inflation and house price growth. This surge is placing significant strain on household budgets, exacerbating the cost-of-living crisis. For many landlords, the increased costs of a mortgage is being passed on to the tenant. But what exactly is driving this dramatic rise in rents, and why is it happening now?
Supply and Demand Imbalance
At the heart of the rental surge is a fundamental mismatch between supply and demand. The UK has long struggled with a shortage of housing, particularly in high-demand areas like London and other major cities. Over the past decade, the pace of new housing construction has consistently fallen short of the number needed to keep up with population growth. This shortfall is especially acute in the rental sector, where fewer new rental properties are being built even as the number of people needing to rent continues to rise.
The COVID-19 pandemic further exacerbated this imbalance. Initially, the lockdowns saw a temporary drop in demand as people moved out of cities or stayed put in their current homes. However, as the country reopened, there was a sudden and intense resurgence in demand, particularly in urban areas. Many people, now working remotely or in hybrid arrangements, sought larger living spaces or moved closer to work as offices began to reopen. This surge in demand collided with a market already constrained by a limited supply of available rental properties, pushing rents upward.
Impact of Interest Rates and Mortgage Costs
Another significant factor driving rent increases is the rising cost of homeownership. The Bank of England has been steadily increasing interest rates in response to high inflation, making mortgages more expensive, although on 1st of August 2024 the base rate decreased to 5%.
As mortgage costs rise, fewer people can afford to buy homes, pushing more individuals and families into the rental market. This increased demand in the rental sector, coupled with the limited supply, naturally drives up rental prices.
Additionally, existing landlords, facing higher mortgage repayments on their properties due to rising interest rates, often pass these costs onto their tenants. This leads to higher rents, especially for those renting properties with variable-rate mortgages.
Government Policies and Tax Changes
Government policies have also played a role in the surge in rental prices. Over recent years, changes in tax policy have made buy-to-let investments less attractive for landlords. For example, the phased reduction in mortgage interest tax relief, introduced in 2017, has significantly increased the tax burden on landlords. This change, along with the additional stamp duty surcharge on second homes and investment properties, has deterred new buy-to-let investors and pushed some existing landlords to sell their properties.
The reduction in the number of rental properties in the market, as landlords exit or reduce their portfolios, has further tightened the supply side of the market. This decline in supply, against a backdrop of rising demand, inevitably leads to higher rents.
Inflationary Pressures
Inflation, while not the primary driver of rent increases, certainly contributes to the overall cost pressures in the rental market. Landlords, like all other businesses, face rising costs due to inflation. Maintenance, insurance, and property management costs have all increased, and these expenses are often passed on to tenants in the form of higher rents.
Moreover, inflation erodes the real value of money over time, prompting landlords to increase rents to maintain their rental income’s purchasing power. In periods of high inflation, landlords may feel compelled to raise rents more aggressively to keep pace with the rising cost of living.
Economic Uncertainty and Market Dynamics
The broader economic uncertainty in the UK is also influencing the rental market. With concerns over the economic outlook, including fears of a recession, many people are delaying large financial commitments, such as buying a home. This delay increases the number of people renting for longer periods, further driving up demand in the rental market.
In addition, the dynamics of the rental market itself can contribute to rising rents. For example, in markets where rental increases are common, tenants may come to expect annual rent hikes, which can create a self-reinforcing cycle of increasing rents. Landlords, aware of this expectation, may feel justified in raising rents even when cost pressures are not as severe.
Why Build or Grow a Rental Portfolio
Experienced rental portfolio landlords in the UK are continuing to expand their property holdings despite challenges in the market due to several strategic advantages. With years of experience, these landlords have developed a deep understanding of market trends, enabling them to identify profitable opportunities even in uncertain times.
They often have access to better financing options, allowing them to capitalise on favourable deals, especially as some less-experienced landlords exit the market due to rising costs. Additionally, experienced landlords can benefit from economies of scale, where managing a larger portfolio reduces per-property costs, making the investment more profitable.
As rents continue to rise, these landlords see opportunities for strong rental yields, making expansion an attractive proposition despite the broader challenges facing the market.
Here at Evolve Finance we specialise in funding solutions for landlords, property developers and Investors.
For new purchases, you could leverage the equity in your existing portfolio by re-mortgaging or opt for a bridging loan to raise capital for a one off purchase.
Reach out and give us a call, we can guide you through the process, helping you explore all available options.
Conclusion
The surge in rents across the UK is the result of a complex interplay of factors, including a persistent imbalance between supply and demand, rising mortgage costs, government policies, inflation, and broader economic uncertainty. Unfortunately, the outlook for tenants does not seem promising in the short term, with many of these drivers likely to persist.
For policymakers, addressing the root causes of this rental crisis, particularly the chronic undersupply of housing will be crucial. Without significant intervention, the pressure on renters is likely to continue, further exacerbating the affordability crisis that is already impacting millions across the UK.