The post-pandemic housing market has been tough for mortgage holders, and, on some measures, even harder for those renting in the private sector.
Stories abound of soaring rental costs, tenants engaging in bidding wars, paying as much as six months’ rent up front and being asked to submit CVs for consideration by landlords. Propertymark, an industry body, recently reported that every property its members put on the market generates an average of 13 prospective tenants.
Yet strangely, none of this fits with the official data which shows that, relative to wages and general inflation, rents have been falling.
The Office for National Statistics reports that in the last year private rental costs have risen by 5.1 per cent, compared to a 6.9 per cent increase in average earnings and 7.9 per cent inflation. Stories of rising rents have multiplied since the pandemic, but since January 2020 earnings have grown by about 20 per cent, almost twice the growth in private rental costs. On these measures, renting has become more affordable.
Unfortunately, these averages miss an important part of what’s happening. The rental squeeze is, indeed, all too real.
The 5.1 per cent increase in rents recorded by the ONS measures the average rent paid by all private renters and relates to the stock of all rental property. When we look at a flow measure of costs, so the cost of a new rental, prices have risen far faster. The estate agent Rightmove reports that average asking rents are rising far faster than earnings – by 9.3 per cent in the last year and by 33% since the pandemic. The increases in London have been even greater.
So the big squeeze is happening for those moving into new rental accommodation, especially those in larger, more popular cities. A similar story of rising rental costs is playing out in the US, Canada, New Zealand and Ireland, with soaring demand hitting constrained supply.
In the UK, costs and regulations have mounted, making buy-to-let a less attractive proposition for landlords.
The 2016 Budget raised stamp duty on buy-to-let properties by three percentage points and between 2017 and 2021 the maximum rate of tax relief on mortgage interest payments for rental properties was cut from 45 per cent to 20 per cent. Since 2020, landlords have not been able to let the least energy efficient properties unless they can show that improvements are not possible or cost over £3,500. These requirements will be tightened over the next five years. The government is also planning to introduce new legislation, the Renters (Reform) Bill, that would end no-fault evictions, ban above-market rent rises and move to rolling rather than fixed-term tenancies.
Yet the largest single factor driving up landlords’ costs has been rising interest rates. The average interest rate on a two-year fixed-rate buy-to-let mortgage has risen from 1.8 per cent on the eve of the pandemic to 6.2 per cent last month. Many landlords have seen their financing costs double or even triple at a time when other investments – notably government bonds – offer attractive yields. Weakening house prices add further risk to the buy-to-let equation.
Buy-to-let has become a less attractive investment, but there has been no mass exodus of landlords. Rather the rapid growth in the stock of buy-to-let property which was seen since 2000 is over. The latest figures, for 2022, show that 19.4 per cent of UK households rent privately, down from a peak of 20 per cent.
This reduction in rental supply has coincided with soaring demand. Rapid earnings growth, up by about 20 per cent since early 2020, has helped bid up rents. And the number of would-be renters has been boosted by high levels of migration. In 2022, net migration – the difference between those coming to the UK and leaving – reached a record 606,0000. (A surge in the number of foreign students returning to the UK after lockdowns boosted migration, as did the war in Ukraine, repression in Hong Kong and the introduction of a ‘points based’ visa regime which has raised migration numbers from outside the EU).
Non-UK nationals account for a high proportion, around 26 per cent, of the UK private rental market, far higher than their share of social housing (8 per cent) or owner-occupied housing (4 per cent). Thus the scale of net migration last year, at over 600,000 people, in a private rental market (in England and Wales) of about 5 million households, is likely to have materially added to rental demand. Analysis by Capital Economics, a consultancy, estimates that net migration could have raised rental levels by up to 8.0 per cent (Levels of net migration into Canada and the US have also been elevated and seem likely to have contributed to rental inflation in these countries).
The big picture then is of a fixed or declining stock of rental property facing a surge in demand. The result, inevitably, is higher rents and, for some, less space (the average private renter in London has about 20 per cent less space than in 1996).
Yet this doesn’t capture the full picture. People who rent tend to be in a more precarious position than owner occupiers. Those living in private rental accommodation typically spend 33 per cent of their income on rent while those with a mortgage typically spend just 10 per cent on mortgage repayments. The Resolution Foundation estimates that 6 in 10 working-age adults who rent are struggling to meet their housing costs. Those who already spent a high proportion of their income on housing are struggling the most. The 25 per cent of private renters who are on housing benefits, the rates of which have been frozen since March 2020, face particular problems.
The post-pandemic factors which have raised rental costs – such as higher interest rates and record migration – will fade. The underlying problem, of rising demand for housing and a constrained supply, will not.
A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. To subscribe and/or view previous editions just google ‘Deloitte Monday Briefing’.
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