In 2023, renters across the UK felt the pinch as average monthly rents soared by a staggering 10.2%. This rise equaled the total increases seen from 2016 to mid-2020, leaving renters with a hefty extra £343 per month. Experts from Hamptons highlight this as an unprecedented surge, with most landlords and tenants experiencing such a hike for the first time.
Exploring the Causes
Several factors have driven this surge in rents. Rising interest rates have had a twofold impact – discouraging new buy-to-let landlords from entering the market and prompting some current landlords to sell their properties. This has resulted in a decreased supply of rental properties, inevitably pushing rents upwards.
Additionally, landlords are passing on their increased borrowing costs to tenants. As of late last year, landlords with mortgages were spending 37% of their rental revenue on mortgage interest, a significant jump from 24% in November 2021.
Furthermore, the higher interest rates have ironically boosted rental demand. With more expensive mortgages, would-be homeowners are finding themselves stuck in rental accommodations longer than anticipated. Following the financial crisis, this trend saw an additional 1 million people turning to renting, and Hamptons expects a similar pattern in the coming years.
Another interesting angle is the investment perspective. As landlords view properties primarily as investments, they’re likely to raise rents to match returns from other assets that have benefitted from the rising interest rates.
What’s Ahead in 2024?
Economists at the Bank of England believe that the spike in rental prices is only temporary. They argue that as higher interest rates impact the housing market and lower house prices, more landlords could enter the market, leading to increased rental supply and consequently, a potential reduction in rents.
However, the real-world scenario could differ. The upcoming election adds a layer of unpredictability. Government actions aimed at easing the cost of living could inadvertently hike rents in the medium term. Additionally, as interest rates might stay high, the pressure on returns and costs for landlords is expected to persist, making significant rent decreases unlikely.
Hamptons analysts suggest that rental growth will likely remain above pre-Covid levels throughout 2024. The anticipated lesser returns on deposit accounts might encourage landlords to expand their property portfolios, but this is unlikely to be sufficient to reverse the trend in rental prices.