Lettings Market Update

Unique combination of market forces impacting the rental market

• An increase in mortgage rates and the rising cost of living sees more buyers putting plans on hold. Instead, they are looking to lettings, increasing the demand for rental property.
• The stock of rental properties hasn’t grown since 2016 with many landlords forced out due to increased regulation and costs.

However, buy-to-let still represents a potentially strong investment vehicle. With continued high demand and future inflationary pressures easing, buy-to-let can generate a good return.

A £117 rise in the average monthly rent across the UK (including London) highlights what has been a sustained upward trend, with average rental values reaching new record highs. This is the result of the continued surge in demand, coupled with a chronic reduction in supply. Increased mortgage rates are locking out first-time buyers who are turning to rental property instead, adding to the demand. The impact is being felt far and wide across the UK, with no real slowdown being seen. However, there are contrasting regional variations, and towns and cities are generally seeing the greatest increase.
Looking around the regions, Scotland as a whole has a lower rental growth rate than the UK average but Edinburgh and Glasgow have higher growth rates at 12.4% and 14.1% respectively.

How much further rents can grow in 2023 depends on affordability. Rent as a percentage of earnings is at its highest level for a decade at 35% and may continue to increase this year. However, if there is an increase in supply then rental growth could start to fall back this year. The figures below show rent as a percentage of average earnings for a single earner, with affordability varying around the UK.

With tenants facing financial pressure across several fronts (such as rising rents, inflation and energy bills), there has been a marked shift in behaviour when it comes to the consideration of the type of properties that they are looking to rent. Over 2022, renters turned more towards 1 and 2 bed flats and away from 2 and 3 bed houses, with the trend accelerating more over recent weeks.

Trends amongst certain demographics are emerging. For instance, younger potential renters are staying longer in the parental home, or moving back in. Couples are downsizing from 2-bed to 1-bed apartments in consideration of the potential cost savings. The lower cost of energy in the current environment for smaller homes is also a major consideration during this period of escalating energy bills.

Statistics from the Zoopla Rental Market Report Q4 2022.