Buy To Let
Rents rise 11% year-on-year – double the average wage increase
Zoopla figures show that earnings have increased 6.7% compared to last year, aggravating the mismatch between rents and earnings.
In mid-2022, rental inflation reached 12.3% with Zoopla noting there is “no sign of any imminent slowdown”.
Zoopla said that rents have risen by around 20% in three years, adding an extra £2,200 a year to bills.
Rental demand up 10% year-on-year
Zoopla stated that demand, which is measured by enquiries received by each estate agency branch, is 10% higher than last year.
“Rents will continue to rise ahead of incomes unless we see a sustained increase in rental supply or a material weakening in demand, both of which appear unlikely at this stage,” it added.
The firm continued that enquiries peaked in summer last year at double the five-year average, but there were a third fewer homes to rent than normal.
The report stated that the number of privately rented homes “remains largely static” at just over five million.
“In simple terms, a static supply of rented housing means new investment that adds to supply is offset by property leaving the sector, as landlords dispose of rented homes as part of ongoing portfolio rationalisation or exit the rental market altogether,” it explained
The firm said there had been a “slight slowdown” in landlord sales due to a “weaker sales market”, with 11% of homes listed for sale early this year being formerly rented. This is down from 13% last year but remains above average.
“Tax changes, growing regulation and higher borrowing costs are leading many private landlords to review their portfolios and the pros and cons of investing in housing,” it added.
Buy-to-let mortgage changes
Zoopla said that the equity needed to buy a new rental home had been increasing due to rising house prices, lower rental yields and tighter lending criteria and has been exacerbated by rising mortgage rates.
It noted that banks were stress testing affordability of new buy-to-let loans at around 6%, compared to 4.5% a year ago.
In London, the amount of deposit equity required has increased from £129,000 to over £257,000, which is around half the property value. Rental yield is around 4%.
The amount of equity varies by region, but in most cases, higher rate taxpayers will need to take a 60- to 70% loan to value (LTV) mortgage.
“The changing economics of buy-to-let, taken together with rising costs, more regulation and the uncertain outlook for property values is severely limiting the level of new investment by private landlords,” Zoopla explained.
It noted that some landlords were shifting to limited companies, but this was not appropriate for all landlords.
“Those that continue to invest will be focusing on buying lower value homes with higher rental yields or looking at segments of the rental market that deliver higher revenues and stronger cashflow potential,” Zoopla said.
Labour market ‘underlying driver of rental demand’
Zoopla said that the labour market had been strong, with the latest ONS figures showing that there were around one million vacancies.
And it is the strength of the labour market which is an “underlying driver of rental demand”.
Many jobs are filled by UK nationals, but the company said that advanced economies were looking to immigration to fill gaps.
Zoopla said that net immigration totalled 503,000 in the year to June 2022,driven by various factors including changes to UK visa rules, humanitarian schemes for Ukrainians and a visa scheme for British Overseas citizens looking to leave Hong Kong.
It added that overseas students had also boosted rental demand, with around 680,000 overseas students recorded between 2021 and 2022. This is up by 122,000 in two years due to new visa rules.
Zoopla said this would bolster student let demand and this could also spill over into the wider rental market, especially during the summer months.
Rental growth expected to be 4-5% by year-end
Zoopla said that it expected a “continued scarcity” of homes for rent this year due to “weaker economics” for investors.
Ongoing completions for build to rent schemes are a “bright spot” and more supply could come from sellers renting out homes they can’t sell due to a weaker sales market.
It noted that rental demand is less likely to be as strong as last year but it expected to remain above the five-year average.
Zoopla said that affordability, or average rents as a percentage of earnings, are close to 10-year highs barring London. It said this would limit rental growth, which is expected to come to 4-5% by the end of the year.