Rental Market: Update
In January’s Rental Market update, James Douglas pointed to the rise in the 12 months to January 2023 by 4.4%, marking the largest annual percentage change since the UK series began in January 2016.
“The demand for renting was incredibly strong in 2022 helping push rents up by 11%. Rents will continue to rise over 2023 but at a slower rate as demand moderates and affordability pressures start to bite harder on renters.” says Richard Donnell, Executive Director of Zoopla.
The residential rental market has really been booming for the past two years, with residential rentals seemingly always rising at a rate much in advance of rises in earnings.
While earnings climbed by 6.7% over the previous year, the rental rate for new rentals increased by 11.1%. There is little indication that the rate of rental inflation will soon drop down, although it has marginally slowed from 12.3% in mid-2022. Renters, especially those on lower incomes and/or receiving housing benefits, are continuously concerned about the 20% increase in rent over the past three years, and even an additional £2,220 per year.
From mid-2021, the demand for rentals increased.
As the economy recovered in the spring of 2021, rental demand and inflation soared as a result of new immigration regulations that attracted a sizable migration of students and other people looking for jobs.
To entice qualified talent, the UK government undertook a significant overhaul of the visa regulations. This was one of the factors that contributed to record-high net immigration of 504,000 individuals in the year up to June 2022. This was helped by initiatives to aid Ukrainians escaping the conflict and a dedicated visa programme for British nationals living abroad who wanted to transfer from Hong Kong to the UK.
Demand is increased by a sharp rise in international students.
Migration was driven by an increase in student enrollment. Because according to revised immigration restrictions, there were 680,0003 international students studying in the UK in 2021–2022, an increase of 122,0003 in just two years.
Due to the increase in student population, a supply/demand imbalance for PBSA has been extensively documented. This implies that demand from students will spread to the larger rental market.
Being a private landlord now has different economics
The majority of buy-to-let mortgages are interest-only. Lenders demand that a property’s rental revenue cover at least 125% of lower-rate taxpayers’ monthly mortgage interest payments. For higher-rate taxpayers, this rises to 145%, reflecting 2016 tax revisions. In comparison to a year ago, banks are currently stress testing the affordability of new buy-to-let loans using a “stress rate” of c.6%, compared to c.4.5%.
The volume of new investment by private landlords is being severely constrained by the shifting economics of buy-to-let, along with higher expenses, greater regulation, and the uncertain outlook for property values. Some landlords are transferring their portfolios into limited corporations in order to achieve more efficiency, but this isn’t always an option.
Given the worsening economic conditions for investors, we anticipate a persistent shortage of rental properties beyond 2023. One encouraging development will be the ongoing completion of build-to-rent projects, which will increase supply at the mid- to upper-end of the market throughout UK cities.
Those that decide to keep investing will concentrate on purchasing lower-priced properties with higher rental yields or researching areas of the rental market that provide higher rents and better cash flow prospects.
Interested in investing or renting out your property? We are here to help.