Rental forecast 2023-27

Predicting future house prices requires a deep understanding of the mortgage debt market, which can be complex. Rental values are also difficult to forecast, but the main factor driving them is generally more straightforward: the balance between the number of people looking to rent and the number of properties available.

INTENSE DEMAND PRESSURE

At its peak in July, UK rental growth was running at 12.3%. Rents in London rose by 17.8%. 

This is more than just a post-pandemic recovery: rents both in London and nationally had already returned to pre-lockdown levels in 2021. Average UK rents were 14.0% above their pre-pandemic level (March 2020) by August 2022. London rates were 9.8% above.

Having recovered from the rent falls we saw during lockdown, surging demand and dwindling supply are driving rental value growth.

There were -26% fewer homes available to rent in Q3 2022 than the pre-pandemic average, according to data from Rightmove. In London the shortfall was even greater at -30%. At the same time, the monthly RICS survey shows that demand from prospective tenants nationally has increased in every month since May 2020.

These measures suggest the high demand for rental properties is expected to continue in the coming months. There are more people seeking to rent than there are homes available. It’s unlikely that this trend will change anytime soon, as rising mortgage costs and a lack of affordable housing make it difficult for people to leave the rental market. However, an increase in the number of properties available for rent could potentially balance out the demand.

LANDLORDS RETURN

While we expect transaction activity to slow in the coming years, many of the factors driving home moves will still continue as normal. Couples will continue to move in together. Workers will continue to take up new jobs halfway across the country. And, sadly but inevitably, the estate agent’s friends death, debt, and divorce will continue to force moves.

The owners of these properties will face a choice. They can choose to sell into an uncertain, illiquid market. Or they can hang back, rent the property out for a few years, and wait for things to look a bit clearer. These accidental landlords will increase the supply of homes to rent, helping to ease the imbalance between demand and supply and stabilising rental growth at more sustainable levels.

The decision these homeowners make will depend on how long ago they bought and the strength of local demand. Someone who bought a flat in London last year, for instance, may feel uncomfortable selling 10% below their purchase price, so will be more likely to let the property out. For someone else who bought their house in the North West ten years ago (over which period prices have risen 58%), selling at a 10% discount to their home’s notional value a year ago will smart somewhat less. 

We can expect to see an increase in deliberate landlords too. Investors, particularly those with cash to hand or that have registered as limited companies, will take advantage of price adjustments to secure stock with less competition from mortgaged owner occupiers. Institutional investor demand for purpose-built homes for rent remains strong, with returns still looking resilient compared to other asset classes. 

All this suggests that rental supply will rise again. Meanwhile, rental demand will remain strong as long as interest rates remain high enough to frustrate aspiring first-time buyers, keeping them renting for longer. That suggests we see rental growth stabilise in line with its long-term correlation with earnings growth, rather than affordability easing beyond that point.

Savills predicts that UK rents will have risen 10.0% by the end of this year, as the bumper growth months of Q4 2021 fall out of the annual figures. Growth will then slow to 6.5% next year, before slowing further beyond 2024 as renters return to spending a similar proportion of their earnings on housing costs as they did in 2014/15.