Alongside pretty much everything else going up rents have been rising sharply of late. But are they going to keep on rising even higher? This week we’ll look at some of the facts and figures behind the rental market at the moment and take in some expert forecasts.
Firstly, how much have rents gone up recently?
There are a number of different indexes but according to the HomeLet Rental Index the average rental value for a new tenancy in the UK last month was £1,199 pcm. This was a 9.9% annual rise, and a 1.3% rise over the previous month.
The equivalent rents in London were £2,003 pcm, 11% higher than a year before and 1.2% higher than the previous month.
So based on this index it seems that rents have been rising in line with inflation generally – in other words they have risen a lot over the last year. A decade ago average UK rents were around £850 pcm, or £1,300 pcm in London.
Why have rents gone up?
Some people claim that rising rents are the fault of so-called greedy landlords. But it’s a lot more complicated than that.
Landlords’ overheads have been rising sharply of late. Especially the cost of finance, of maintenance and the cost of complying with letting rules and regulations. At the end of the day these all have to be covered by the tenant.
The supply and demand imbalance has also likely served to push up rents. Some landlords have exited the letting market of late but demand for rented accommodation still remains strong. As with anything else that is in high demand and short supply the price gets pushed up.
Many private landlords in particular have tended not to raise their rents every year in order to help keep good tenants. So there is an element of ‘catch up’ in operation too. When their properties come up for reletting they have found that the new rental levels they can achieve are much higher.
What’s likely to happen to rents next?
In what circumstances could rents stop rising or even fall? Either landlords’ costs could go down, or demand could drop off. Neither of these are likely to happen any time soon.
In fact, quite the reverse is more likely. Landlords’ costs are likely to keep on rising. The supply of rental property is likely to drop even further, while demand for it remains strong.
The only possible bright spots, if it is possible to call them that, is that inflation is forecast to fall over the next year. The interest rate might fall slightly next year and help reduce landlords’ mortgage costs.
Higher rents and falling property prices could mean landlords can earn higher yields and this might tempt more investors into the buy to let market and increase the supply of rented property.
These factors might moderate future rent rises. But as with most other things, once prices rise and people get used to paying them, they very rarely come down by much if at all.
Some expert forecasts for rents
Now let’s take in some expert forecasts for UK rents:
* A recent Knight Frank UK Housing Market Forecast Update predicts UK average rents will rise an average of 3.4% a year over the next five years, or 18.2% cumulatively over that period. In London they will rise an average of 3.7% a year over the next five years, or almost 20% in total over that period.
* A recent Savills Residential Property Market Forecast is broadly similar. It predicts UK mainstream rental values will rise an average of 3.4% a year over the next five years, or 18.3% in total over that period. In London they will rise an average of 3.4% annually over the next five years, or 18.4% in total over that period.
So will rents keep going up and up?
Both the theory and the forecasts seem to suggest that rents in the UK will just keep going up and up. An average of around of £1,200 pcm could become almost £1,500 and then £1,800 in just a few years. They suggest that in London an average rent of £2,500 pcm or a £30,000 a year could not be all that far off.
But there is a very big ‘but’ here. And that is affordability. Renters can only afford to pay so much rent each month. Rents can keep on rising and rising but there is something of an affordability ceiling in place – which is largely linked to wage levels. When that ceiling is reached rents simply can’t go up anymore, no matter how much landlords want or need to.
So, the chances are that rents won’t keep going up and up because of this. But there could be problems ahead in the rental market if landlords’ costs keep on rising and rents reach levels which significant numbers of tenants can’t afford.