Britain's rental market has seen a rise in the cost of new tenancies in recent years, a trend that is set to continue, according to the Resolution Foundation. The think tank cautioned that average rents could rise by 13% over the next three years, outstripping wage growth and placing an additional burden on tenants.
Current State of the Rental Market
According to the Foundation's report, although rent increases for new tenants have slowed recently, rising by 18% since January 2022, overall market rates remain high and are affecting existing tenants.
Two main reasons for the rise in private rents are identified in the report:
- The market's recovery from the pandemic
- Fast-rising wages in recent years
Interestingly, average private rents have remained relatively stable as a percentage of average earnings since 2000, and the Foundation notes that rents have generally tracked wages over the long term.
The rental market was seriously disrupted during the pandemic, with evictions and repossessions coming to a standstill. As a result, rent levels relative to earnings fell to their lowest levels on record.
However, with the market recovering post-pandemic, rents are 'correcting' and the UK's rent-to-earnings ratio is returning to its long-term trend.
The Role of Wage Growth
This post-pandemic recovery has been amplified by historically high income growth. Should average rents paid return to pre-pandemic levels relative to incomes in three years' time, every letting is likely to see price growth of more than 13% over that period.
If it is assumed that average rents paid will return to their pre-pandemic level compared to earnings in three years’ time, then rents for all tenancies would see over 13 per cent price growth over that period (or 4.2 per cent a year on average).
Such potential rental price growth is well above the 7.5% average earnings growth forecast by the Office for Budget Responsibility (OBR) over the same period.
Largely due to the inability of many to save for a deposit on a property or to afford rising mortgage rates, there has been a marked shift towards renting. This has led to a significant growth in the number of families renting privately, doubling from 11 per cent in the late 1990s to almost 20 per cent today.
Private rental demographics are also changing, with the sector no longer predominantly used by people in their twenties. Among those renting, the number of households headed by people aged between 30 and 49 has risen considerably, from 11% in the mid-1990s to almost 30% in 2021-22.
Despite claims that rate rises and stricter regulations have pushed landlords out of the PRS, reducing the supply of available homes, the Foundation's analysis shows that the sector has experienced only a modest contraction, equivalent to just 1%.
The upside should be an end to the surge in rents for new lettings, with the end of the post-pandemic correction and a slowdown in wage growth. However, it will take years for the observed growth to be passed on to the private rental sector as a whole.