Cost of rent soars 10% in a year, growing faster than average earnings
Annual rental inflation came to 10.4% in June – the 15th consecutive month of double digit growth – outpacing earnings growth since October 2021.
The imbalance between supply and demand continues to push rents higher across the UK, according to Zoopla, but the rental inflation slowed from a recent high of 12% in August 2022.
The firm added that the imbalance between supply and demand would continue into the second half of the year as we enter the busier summer period when demand typically increases by up to 40%.
However, it expects rental growth to slow towards 8% by year-end, which is still above earnings growth.
Zoopla said that over half of tenants reported a rent increase, which is up from over a third six months ago.
The proportion of renters falling behind in rent has doubled during that period from 4% to 8%.
“Landlords will need to support renters and manage rising arrears. Higher rents are manageable at his stage for many, but this will vary across markets,” it said.
Zoopla continued: “With a low likelihood of a major boost in supply, it is affordability and demand side factors that will have the greatest impact on rent inflation.
“We expect rental inflation to slow towards eight per cent this year, higher than we expected. We anticipate affordability pressures to start to impact rental inflation in the highest value rental markets over the next six to 12 months. In more affordable areas, there is still some headroom for rents to increase further.”
London rental now 40% of earnings
The report revealed that average UK rents accounted for 28.3% of average pre-tax earnings, which compares to a 10-year average of 27%.
Zoopla said that rental affordability was at its worst for a decade in seven out of 12 regions in the UK. In another four regions, earnings spent on rent are within 2% of the last decade’s high.
Renting in London is the most expensive of all regions, on average of 40% of gross earnings, but this is below the peak of 43% recorded in September 2015.
“The longer rents rise faster than earnings, the greater the affordability pressures on renters. It will ultimately start to impact demand and the pace of rental growth,” it added.
Landlord exodus not expected
Zoopla said that the rental inflation will only slow if there was a material increase in supply or weaker demand, but the latter was “unlikely” due to rising mortgage rates impacting first-time buyers, strength of the labour market, high immigration and July to September being the busiest period for rental demand.
It noted that the level of homes was 20-40% below pre-pandemic levels in most regions, so renters were chasing fewer homes, which in turn drives up rental inflation.
Zoopla said that supply levels were unlikely to grow and that higher borrowing costs were hitting business plans of new investors, slowing the pace of new investment.
“We do not expect to see a worsening in supply and talk of an exodus of landlords is being somewhat overdone,” it noted.
The company said that sales data continued to show a “steady, constant flow of private landlords selling up”, a trend since 2018, but it was not accelerating.
It added that there was continued new investment in rented homes, especially from corporate and institutional landlords.
One in 10 homes for sale are former lettings
Zoopla noted that 11% of homes for sale on the portal were former lettings and this was “broadly consistent” for the last three years.
The firm said that pre-pandemic around half of these properties would return to the rental market as unsold or bought by an investor, but this has fallen to around 30%.
“It means that more homes are lost from the rental market than can be replaced by the flow of new investment.”
More than third of landlords have no mortgage
Zoopla said that 38% of landlords have no mortgage, 32% have a lower loan to value (LTV) mortgage and 30% have a higher mortgage of more than 50% LTV.
The company said that the impact of rising mortgage rates was impacting the 20-30% of landlords with the highest LTV mortgage. London and South East account for over half of landlord sales.
“These regions have high capital values and low rental yields. This makes the economic situation tougher for landlords in the face of rising mortgage rates, as profits are reduced, especially for higher rate tax payers.
“The main option for landlords is to inject equity at a point of refinancing. However, it’s an unattractive option for many with concerns over low yields and the risk of further price falls,” it said.