Rental unaffordability hits highest level for a decade
Rent as a percentage of earnings as a single earner has reached 35%, the highest level for a decade, and could worsen further if rental growth continues to outpace earnings.
According to property website Zoopla’s UK rental market report, rental growth has outpaced earnings since June last year, and rents have increased by 12.1% in the 12 months to October. This is equivalent of £117 per month, or £1,400 a year.
Rental inflation for the three months to October was pegged at 3.6%, which is the highest quarterly gain since December last year.
The report said that London, South East and Eastern England were just short of the all-time high recorded in 2015 and 2016.
Zoopla continued that if rental growth continued at its current pace of 12% into next year, the proportion of earnings needed to pay rent could be stretched to 37%.
“This is not likely or feasible and we expect the growing unaffordability of renting to hit spending power,” it added.
Zoopla said that worsening rental affordability and a “modest improvement” in supply could lead to growth slowing to five per cent over 2023.
The report said that rental growth was fuelled by “chronic imbalance” between supply and demand in the rental market, and was exacerbated by rising mortgage rates limiting access to homeownership for first-time buyers.
Rental enquiries per estate agency branch are 46% above the five-year average, and whilst the average number of homes for rent per branch has risen to 10, up from a low of seven in September, stock remains 38% below the five-year average.
Zoopla said that around three quarters of renters do not move each year, so rental increases would be lower than for new lettings. Due to this, more are expected to stay put to avoid higher rental payments which compounds supply issues.
‘Modest improvement’ in rental supply expected
Zoopla said that the quickest way to slow rental inflation was to increase rental supply but it did “not expect any major improvement” over the next 12 months.
It said that the stock of homes for rent had stayed stable at close to 5.5 million homes since 2016 and over the last seven years, some landlords have been selling assets due to higher taxes and regulation.
However, it said the reduction in rented homes had been “offset” by investment from cashflow-focused private landlords and corporate investors operating build-to-rent schemes.
It added that higher mortgage rates in the buy-to-let sector had limited new purchase volumes which could boost the rental supply.
More landlords could leave
Zoopla noted that upcoming legislation that could mandate rental properties have an EPC of C or higher could lead to more landlords leaving the sector.
“We do, however, expect some modest improvement in rental supply as the sales market weakens. Landlords looking to sell homes may now continue to rent them out, while uncertainty in the wider sales market lasts. Rental supply will increase but not sufficiently to drive a material slowdown in rental inflation in isolation,” it explained.
The report said that policymakers “need to better understand the rental market as well as the forces and factors shaping the overall availability of supply”.
It explained: “The demand for rented homes is only going to rise in the medium term, so it’s important we encourage more supply from all forms of landlords, whether private individuals or large corporates. It is important that policymakers encourage good landlords of all types and sizes to stay in the market and deliver much-needed supply.
“Only by increasing investment in the private rented sector can we ease the affordability pressures on renters in the medium term and make for a more sustainable rental market.”
Large cities record largest jump in rents
Rents are rising the fastest in large cities, with London rents up 17% or £273 over the last 12 months.
The report added that above-average rental inflation has been recorded in Manchester at plus 15.6%, Birmingham at plus 12.3%, Glasgow at plus 14.1%, Bristol at plus 12.9% and Sheffield at plus 12.4%.
It explained that these cities were seeing demand outstrip supply as they were “major employment centres with large student populations”.
Hull, York, Oxford and Leicester reported slower growth at less than 8%, but this is till higher than the current 6% earning growth.