Key points –
- UK rental prices are expected to significantly slow down starting from 2025 after a period of unprecedented growth, with rents having surged 9.5% in 2023 and set to increase by 6% in 2024.
- The record-high rent-to-income ratio, with British renters spending a third of their income on rent, indicates the market is nearing an “affordability ceiling.”
- The slowdown in rental growth will adversely affect debt-laden buy-to-let landlords, who may struggle to cover increasing mortgage costs and could be forced to sell their properties.
- Cash-rich landlords and large build-to-rent institutions, however, will likely benefit from the situation, potentially expanding their portfolios as interest rates fall.
- Rental growth forecasts vary by region, with the south-west and south-east of the UK expected to experience higher rent increases compared to the north, reflecting regional differences in wages and rental supply.
The UK rental market has experienced a significant surge, with record-breaking growth in residential rental prices. However, this pace is set to dramatically slow down from 2025. Estate agency giant Savills has forecasted that by 2023, rents will have risen by a staggering 9.5%, followed by a 6% increase in 2024. But from 2025 onwards, this growth will decelerate to 3.5%, continuing to decline over the next few years.
What’s Driving These Changes?
Several factors contribute to the current rental price hike. Key among them are:
- Wage Inflation: Higher wages have fueled the ability to pay more in rent.
- Limited Housing Supply: A classic case of high demand versus low supply is pushing prices up.
- Landlords Passing on Costs: With rising interest rates, landlords are offloading these costs onto tenants.
Despite these drivers, the growth is deemed “highly unusual” and unsustainable at current levels.
The Rent-to-Income Ratio
The HomeLet rental index reveals a startling reality: British renters now spend a third of their income on rent, marking the highest rent-to-income ratio ever recorded. In London, the situation is even more dire. This unprecedented ratio signals that the market is nearing what experts call an “affordability ceiling.”
The Lag Effect
Lucian Cook from Savills highlights a “lag” in how this ceiling impacts real rents. While some tenants are still willing to pay high rents due to the supply-demand imbalance, this situation is not expected to last. As rents continue to climb, mortgages may start to appear more affordable, particularly post-2025 when interest rates are anticipated to drop.
Changing Family Dynamics and Tenant Choices
As rent devours a larger portion of salaries, parents may become more inclined to assist their children with house deposits. This shift could lead to tenants compromising on location or property size in pursuit of affordability.
The Pressure on Debt-Laden Landlords
For BTL landlords burdened with debt, the forecasted slowdown in rental growth spells trouble. Their ability to raise rents to cover increasing mortgage costs is becoming increasingly constrained. This pressure is evident, with a reported doubling in BTL mortgage arrears from Q3 2022 to Q3 2023.
A Different Story for Cash-Rich Landlords
In contrast, landlords who own properties outright or have minimal mortgages face a less grim future. These landlords, along with large build-to-rent (BTR) institutions, are poised to benefit from falling interest rates and may expand their portfolios.
Regional Variances in Rental Forecasts
Savills’ predictions for rental growth vary by region, influenced by factors such as wage levels and housing supply. For example, the south-west and south-east are expected to see a 20.4% rise in rents from 2024 to 2028, whereas Yorkshire & The Humber and the north-east may only experience a 15.3% increase. London, with its unique dynamics of high demand and wage growth, coupled with an increasing stock, is forecasted to have a slightly lower rental growth of 18.2% during the same period.