Rents are set to rise sharply over the next few years, as buying a house gets further out of reach for many.
Whilst this is bad news for renters it will increase the rental yields for investors. Rents are predicted to increase by an average of 25% between now and the end of 2026 owed in part to rising mortgage costs and a widening supply-demand imbalance in the PRS.
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.
Hamptons, part of the Connells Group, forecast that rents will rise 25% over the next four years, outpacing 5.5% price growth across Great Britain.
It is predicted that 2025 will mark the beginning of a new property market cycle with London starting to outperform all other regions for the first time since 2015 with 5.0% annual price growth. Overall, London will see the strongest growth between 2023 and 2026 of 11.5%, with prices in Wales likely to remain flat.
Hamptons forecast just under 1m transactions across GB in 2023, a 19% decline on the 1.23m completions in 2022. Slightly lower mortgage rates and improved affordability in 2024 will encourage 1.1m completions.
The forecast suggests that transactions should recover to at least their pre-Covid norm in 2025 as lower mortgage rates unlock moves from previously priced out households. However, a higher interest rate era will mean that the new norm will be between 1.2m and 1.3m transactions each year, rather than the 1.3m-1.4m we predicted last year.
We forecast the average rent on a newly let property in Great Britain will rise 8% in Q4 2023, 7% in Q4 2024 and 5% in both Q4 2025 and 2026.
London rents are likely to rise faster than the GB average in 2023 and 2024 (by 9% and 8% respectively). A combination of lower yields and more landlords being reliant on finance will put added pressure on investor profits in the capital.
Aneisha Beveridge, head of research at Hamptons, said: “Despite rising rates and the cost-of-living crunch catching many households off guard, it’s becoming increasingly clear that the house price crash that some forecasters envisioned hasn’t materialised. Rather, we expect a minor price fall in 2023 followed by a slower recovery over subsequent years as households adjust to an era of higher rates. This will be more akin to the U-shaped downturn of the early 1990s than the V-shaped crash and subsequent speedy recovery in 2008.
“On paper, the house price falls we forecast are minor in nominal terms. But high inflation for other goods and services means that in real terms, the average price of a home will have fallen around 11% between 2022 and 2024. This essentially reflects “the correction” caused by higher rates. It’s also why we expect prices to rise again in both real and nominal terms from 2025 as rates fall to their new normal and a new housing cycle begins.”
Rental growth forecast on newly let properties
Beveridge added: “There’s a strong argument that the Bank of England’s quest to quell inflation has hit the rental sector harder than any other part of the housing market. A build-up of long-term supply issues combined with soaring landlord costs is putting upward pressure on rents. And it’s hard to see any of these pressures receding any time soon, which is why we expect rents to continue rising over the next few years.”
The average rent on a newly let property in Great Britain rose by 9.9% in July, marking the 27th consecutive month in which rental growth has exceeded 5%. Despite affordability pressures for tenants, the shortage of rental homes combined with rising landlord costs will continue to put pressure on rents. There were 43% fewer homes available to rent across Great Britain in July than the same month of 2019.
Given that 68% of landlords own a buy-to-let with some sort of finance, rents will primarily be set by where interest rates settle in the medium term. We forecast rents will rise by 25% across Great Britain between 2023 and 2026, with the largest increases during 2023 and 2024 as landlords roll off fixed term deals and face considerably higher mortgage payments.
This will likely put the average rent of a home in Great Britain at £1,550 per calendar month (pcm), £333pcm more than in December 2022. Despite this rental growth, many landlords will still find themselves materially worse off than a couple of years ago.
We think rental growth will be led by the North of England and London over the next year. hese are places where larger portfolio landlords, which are more likely to be reliant on some form of finance, are most active. London is also the lowest yielding region in the country on average and so landlords here have less ability to absorb higher costs.
However, steeper borrowing costs are not the only issue, with substantial regulatory reforms on the horizon. The Renters Reform Bill is likely to further add to landlords’ costs, and more regulation may well be in the pipeline whichever party wins the general election.
So far, transactions, rather than house prices, have borne the brunt of the slowdown. HMRC figures show that there were 555,780 sales in the first seven months of this year, 128,730 (19%) fewer than in the same period of 2022, during the post-Covid boom, and 12% fewer than in the first seven months of 2019.
Since mortgage rates hit a new peak in July, there is unlikely to be a meaningful uptick in transactions in the second half of the year. We think that the total for 2023 will be just under one million. This will be the lowest number of residential completions since 2012. But more significantly, it will also be just below the total of 2020 when there were 1.02 million, despite multiple lockdowns.
The gap between average landlord purchase and sale price (England & Wales)
Topics:UK Property, Real Estate Market, Prices, Market Trends, Events, Demand, Appreciation, Investment Strategies, Overseas Investors, Yield