The private rented sector in the UK is experiencing unprecedented rent price growth as the imbalance between demand and supply continues to drive up rents, a report reveals.
According to Savills, the average UK rent has increased by 26% in the last two and a half years, reaching £1,053 per month in September 2023.
This is the highest annual growth rate on record, surpassing the previous peak of 8.8% in 2015.
The report forecasts that rents will grow by 6% in 2024, before hitting an 'affordability ceiling' in 2025, which is when rent increases will slow down to match tenant’s income growth.
Rental demand has consistently outstripped supply
The real estate firm's residential research team director, Emily Williams, said: "Homes to rent continue to be in significant short supply. The end of a series of national lockdowns sparked increased rental demand in mid-2021 that has consistently outstripped supply ever since.
"At the same time, the rising cost of debt has impacted the profitability of many mortgaged landlords.
"This, together with a changed tax and policy environment, is forcing an increasing number to sell their properties."
Spending a higher proportion of their income on rent
Savills says that by 2025, renters will be spending a higher proportion of their income on rent than at any point in the last 18 years.
The average PRS household spends 35.3% of their income on rent, up from 33% in 2021/22, Savills says.
This is well above the 30% threshold that is widely considered to be affordable.
The report also highlights the regional variations in the rental market, with London being the most expensive and the most constrained region for rented home supply.
Rents in the capital have risen by 31% in the past two years, and now account for 42.5% of the average renter's income.
As a result, renters in London have reached their limit of how much they can afford to pay, and rental growth has slowed down from an average of 1.2% per month in 2022 to 0.6% per month so far in 2023.
'Tenants are having to bid upwards to secure a tenancy'
Ms Williams said: "Competition for stock is tough, and tenants are having to bid upwards to secure a tenancy, supported – but only in part – by a strong growth in incomes, fuelling rents upwards in the short-to-medium term.
"It's very difficult to see where an increase in rental supply will come from in the next couple of years.
"Higher borrowing costs will also keep would-be-buyers in the rental sector for longer, underpinning demand, and while some landlords will be able to transact in cash to avoid the higher cost of debt, this is unlikely to move the dial on supply."
She added: "Any significant increase in stock in the sector will be delayed until 2026 and beyond, when interest rates have fallen more substantially."
Landlords expecting 5-10% rent increases
Savills also notes that there is a mismatch between landlords' and tenants' expectations in London, with more than half of landlords expecting 5-10% rent increases, while only a third of tenants expect to pay up to 5% more.
The report predicts that London's rents will remain lower than the UK average until the end of 2024 but will then pick up again as the supply challenge and the economic outlook improve.
The regions that are expected to see the highest rental growth over the next five years are the South East and the South West, where rents have risen by 24% and 23% respectively since March 2020.
The report attributes this to the lower yields in these regions, which means that landlords are less likely to invest in new properties, leading to a greater supply shortage.
Savills is also warning that rent price growth in Scotland could exceed expectations if the Scottish Government’s rent cap policy leads to more landlords exiting the sector.
The report concludes that the struggles of private landlords point to the build-to-rent (BTR) sector, along with institutional landlords, playing an important role in future but their ambitions will be limited by the planning environment and the challenging debt market.
'Things will get financially worse for tenants'
Simon Thompson, the managing director of Accommodation for Students, said: "The bottom line from Savills appears to be that things will get financially worse for tenants.
"Not that the situation for landlords is much better but talk of reaching an affordability ceiling is a subject that is increasingly being discussed.
"All landlords will be concerned about whether their tenants can afford to pay rent and the affordability ceiling issue should concern us all."
He added: "Things need to improve for landlords so we need government help, especially with taxes, and we need more housing to boost supply levels - because that appears to be the only way at the moment to reduce the high rents for tenants."
