It’s a tale of two markets: while private rents have soared to record highs in the UK, making life precarious for tenants, the for-sale sector has slowed sharply and property values have started to fall, with sharper declines predicted for next year.
The latest house price index from Nationwide, Britain’s biggest building society, along with Bank of England mortgage lending data due this week, should shed further light on the severity of the UK’s housing slowdown.
The market was cooling, and mortgage rates were creeping up, even before the Truss government’s disastrous mini-budget brought the pandemic-era housing boom to an abrupt halt.
Mortgage rates jumped to well above 6%, a level last seen in 2008, adding hundreds of pounds to mortgage payments and triggering a collapse in demand. Unsurprisingly, Nationwide figures for October showed the first monthly drop in house prices in 15 months: at 0.9%, it’s the largest fall since June 2020.
Expensive mortgages have deterred many first-time buyers, who are now renting instead in the hope that rates will fall in the new year – causing intensified competition in the rental market, according to property site Rightmove.
But that’s not the only explanation for the surge in rental costs. Tenants who work from home prefer, if they can afford it, to live alone rather than in a cramped house share, says Andrew Wishart of Capital Economics. The number of people renting a property alone rose by 530,000 in 2020-21, while the numbers renting in a household of three or more fell by 2 million.
Wishart suggests cost of living pressures could reverse this trend somewhat. “But with the average tenancy lasting four years, it won’t happen overnight,” he says, adding that buy-to-let landlords face a severe financial squeeze over the next few years and many could sell up, further reducing supply.
That shortage of rentals has, unsurprisingly, pushed up the amount tenants are prepared to pay. London estate agent Foxtons has reported a 22% year-on-year surge in rents in the capital in the first nine months of 2022. The average rent hit a new high of £571 a week – about £100 higher than at the beginning of the year.
Record numbers of new renters registered in the third quarter: there were 30 for every property listed, which is around three times recent levels. At the same time, supply has dwindled: new instructions from London landlords have fallen by 18% in the first nine months compared with a year ago.
Foxtons describes the conditions in London’s rental market as “extraordinary”, adding that “the impact of the post-Covid return to the city has been acute”.
Supply problems have been exacerbated by a rise in overseas student renters and corporate lets, and by 11% of landlords opting to sell their property at the end of a tenancy this year.
According to research published by Rightmove last month, advertised rents have jumped even more in some other cities and towns. These include Newbury, Manchester and Cardiff, which have all seen annual rises of close to 20% or more. Rents are expected to climb higher still next year, while house prices are set to head the other way, with many experts predicting declines of between 5% and 12%.
Capital Economics is forecasting that housing transactions will slump to their lowest level for a decade in 2023, and that the average house price will fall by 12%. Rightmove has estimated a smaller drop, of up to 5%, while property firm JLL is predicting a 6% decline.
Meanwhile interest rates are still on an upward track, with the Bank of England forecast to increase them by a further half point to 3.5% in mid-December. Rates are expected to peak at 4.25% next spring, which is lower than had once been feared.
“Even though mortgage rates are likely to drop back to 4% by 2024, we suspect that house prices will have to fall by 12% before affordability improves enough for demand to recover and the fall in prices to bottom out,” says Wishart.
Demand For Rental Homes Pushes Upwards as House Sales Market Slows
This is contributing to an upward pressure on rental prices, at a time when house prices have been falling month-on-month, the findings from the Royal Institution of Chartered Surveyors (Rics) indicate.
A net balance of 35% of property professionals saw a pick-up in rental demand in November, while a balance of 27% reported a decline in landlord instructions.
The mismatch between demand and supply continues to drive rents higher, with a net balance of 43% of contributors anticipating rental prices moving higher over the coming three months.
Looking at the house sales market, a net balance of 38% property professionals reported a fall in demand from house hunters.
The imbalance in the rental market remains significant
Simon Rubinsohn, Rics
House sales were also down, with a balance of 35% of professionals reporting a decrease.
An overall balance of 25% survey participants observed house prices falling rather than rising.
Prices were said to be retreating across most parts of the UK, according to Rics, with the latest feedback especially downcast in the south sast and south west of England. For now, prices continue to edge higher in Scotland and Northern Ireland, but the pace of growth is significantly subdued compared with earlier in the year, the report said.
The imbalance in the rental market remains significant as landlord instructions continue to fall and is consistent with further increases in rents, even if the momentum does appear to be slowing just a little
Simon Rubinsohn, chief economist at Rics
Over the next 12 months, an aggregate net balance of 61% of property professionals surveyed expect to see further declines in house prices rather than increases.
Simon Rubinsohn, chief economist at Rics, said: “The imbalance in the rental market remains significant as landlord instructions continue to fall and is consistent with further increases in rents, even if the momentum does appear to be slowing just a little.”
The Rics report also quoted the views of property professionals.
One, based in the West Midlands, said: “Definitely signs that the troubles in the economy are now impacting sales in the housing market.
“Many more chains are breaking, everything is taking longer to sell and prices are starting to fall. More challenging times lie ahead.”
Another, based in Northern Ireland, said: “Many buyers are adopting a ‘wait and see approach’.
“Now the autumn statement is out of the way, we should see normality return, albeit after the Christmas period is over.”
An Edinburgh-based estate agent added: “Despite the economic situation, we have also seen very few fall throughs in agreed sales over the last three months.”
Where rents have risen the most in cities across UK
According to the property portal website Zoopla, the average rent for a new letting has leapt to £1,078 a month, a £117 increase compared to last year.
This means rental prices have soared at twice the pace of wages in the past year, with no signs of slowing down anytime soon.
Single people already battered by snowballing food and fuel bills will hand around 35% of their incomes to landlords – the highest in more than a decade.
And this is expected to edge towards 40% by 2023, Zoopla predicted in its end-of-year market report released today.
Rents have risen to stratospheric levels the fastest in major UK cities driven by strong employment markets and large student populations.
People’s rental opportunities in these cities are few and far between as well given that demand far outstrips supply.
In London, the median monthly rent sits at an eye-watering £1,879 – a rise of £273 per month to last year.
Many cities have seen rents climb by double digits. The rental pain was pronounced in Manchester, seeing a 15.6% leap to £928.
Monthly rent in Glasgow rocketed by 14.1% to £813, while Bristol ballooned to £1,254 – up 12.9%.
Sheffield, Birmingham and Edinburgh saw similar rent hikes of more than 12%, or £735, £820 and £1,060 respectively.
Rent in Cardiff, the Welsh capital, also soared by 11.7% to £984.
One of the smallest rent increases – but an increase nevertheless – was in Northern Ireland’s capital city, Belfast. Rent rose by 7.6% to £694.
Slower rental growth of less than 8% was seen in smaller cities like Hull, York, Oxford and Leicester – yet that’s still higher than the average 6% rise in earnings last year. Though some 13 million renting from a private landlord were granted some relief by the housing market being rattled by the government’s October mini-budget.
This led to a modest increase in rental supply in recent weeks, with the number of rentable homes shown on real estate shopfronts going up from seven in September to 10.
Hard-hit renters are doing their best to adapt to rental unaffordability, such as eyeing up one and two-bed flats and houseshares, Richard Donnell, executive director at Zoopla, said.
That is, if they can even afford to move out at all. Donnell said Zoopla has seen people move back home with relatives to stay afloat.
‘A chronic lack of supply is behind the rapid growth in rents which are increasingly unaffordable for the nation’s renters, especially single-person households and those on low incomes,’ he said.
‘Many are also staying put to avoid the worst of rent increases.’
Private renters already have a lengthy list of woes compared to homeowners. They’re twice as likely to suffer from anxiety due to, among other things, financial insecurity, a report by the Joseph Rowntree Foundation found.
Rental rights groups reacted with a lack of surprise at the news that rent is burning an ever-increasing hole in people’s pockets.
Al Mcclenahan, training lead for helping Justice for Tenants, said rent is just another factor deepening the cost-of-living crisis closing like a vice on tenters.
The group’s helpline, he told Metro.co.uk, has seen phone-ins from tenants struggling to afford both rent and food for their families ‘double’.
‘It also creates an environment where tenants are too scared to report damp, mould and other issues in the property because they fear their landlord will increase their rent,’ he says.
‘Most tenants don’t have any options, there isn’t enough social housing to be an alternative, and if they move further away from a city centre, they have to spend more money on transport and can work fewer hours if they have to pick their kids up from school, so they are trapped between a rock and a hard place.’
Alicia Kennedy, director of the campaign group Generation Rents, said renters are ‘paying the price’ for the lack of new homes being built.
And their current options aren’t great. Around 13% of the estimated 619,000 privately rented homes and flats in England fail safety standards, Generation Rent says.
‘Even renters who are happy where they’re living are vulnerable because there is very little stopping landlords from raising the rent to an unaffordable level or kicking them out to get someone in who can pay more,’ Kennedy said.
‘With prices going up throughout the economy, more renters will be pushed into poverty.
‘Long term the answer is more homes and particularly social housing, but right now the government must step in to freeze rents and suspend no-fault evictions.’