Recent figures point to a slightly rosier landscape for the UK consumer. Inflation is on a downward trajectory, while earnings growth remains historically elevated, supporting real-terms improvements in spending power. However, the aggregate figures obscure significant variations in trends amongst demographics, with certain groups continuing to bear the brunt of the cost-of-living crisis. Private renters are a notable example.
Recent data from the Office for National Statistics (ONS) showed that average private rents increased by 9.0% in the year to February. This was the fastest rate since comparable records began in 2015. For context, in the four years prior to the pandemic, UK rental prices rose at an average annual rate of just 2.2%, roughly in line with expectations for the general rate of price growth.
Rental price growth data showed a degree of variation between regions. Scotland showed the fastest rate in February, at an annual rate of 10.9%. This comes in spite of recent policy measures capping rent price increases in the country, though was down on the recent high of 11.8% recorded in August. Other regions recording above-average rates of rental price increases included London, where costly rents are a well-documented issue, and the West Midlands, partially driven by falling rental property stock in Birmingham, the region’s largest city. At the other end of the scale, the slowest rate of rental price increase was recorded in the North East, at 5.7% annually. This was still firmly above historical averages, however, highlighting that growth in rental prices is a problem experienced across the country.
There are several factors potentially driving the stark increase in rents. Firstly, property prices soared during the pandemic period, maintaining elevated growth rates until roughly the end of 2022. Rental price growth was slower to react to the drivers of this trend, with the fixed price agreement nature of rental contracts creating a lag in pass through. The currently elevated growth in rents could, therefore, simply be a matter of catching up.
More fundamentally, stark rental price increases are being driven by a misalignment of demand and supply. There is a two-stage effect, with excess demand for homes more broadly meaning heighted costs for purchasers, including landlords. The second stage is then a similar mismatch applying to leased properties specifically, increasing the rates that landlords can charge.
On the demand side, a much larger share of the population now relies on the private rental sector than in the past, driven by weaker homeownership affordability. However, this is a relatively longstanding trend and does not in itself explain the recently elevated rate of rental price growth.
The key factor then is the supply side. The number of properties available for rent remains subdued, with recent data from Zoopla showing that the average letting agent currently lists just 12 properties for rent, down by 28% relative to the pre-pandemic average.
One potential driver of low supply is the withdrawal of private landlords from the market amidst continued economic constraints. Key here is the tighter monetary policy environment, with elevated interest rates increasing the costs of servicing buy-to-let mortgages. There are also regulatory factors, including tax liabilities and flexibility of tenancy arrangements, that are acting as a disincentive for prospective landlords to invest and encouraging current landlords to withdraw.
The current rate of rental price increases is far exceeding the headline rate of inflation and has now done so for eight consecutive months. Rent increases are also firmly exceeding the rate of growth in earnings. Rents, therefore, represent a considerable source of pressure on living standards, the effect of which is particularly exacerbated given that renters tend to be lower earners relative to other tenure types. The cost burden of rents is highlighted by recent ONS data showing that private renters on a median household income would spend more than a quarter (26%) of their income on a median price rented home in England, increasing to 35% in London.
Cebr analysis suggests that the cost of renters’ basic spending, defined as essential goods and services, has increased by 12.8% since the onset of the cost-of-living crisis. This firmly exceeds the equivalent rate of 11.5% for homeowners, though does fall short of the 13.1% recorded amongst social renters, a group likely to have even lower earnings on average. Within this figure, the typical rental household must now spend an additional £2,000 per year in order to service their housing costs.
At this stage it is difficult to suggest policy measures to resolve this situation. The Renters (Reform) Bill is currently under consideration in parliament, though this focuses more on strengthening tenants’ rights than prices. Importantly, if the theory behind increased regulation of landlords leading to market withdrawals and upward pressure on prices is true, then the Bill may end up doing more harm than good when it comes to improving rental affordability. Meanwhile, it is difficult to envisage rent controls as an answer, with evidence from previous case studies, including Berlin and Stockholm, suggesting supply curtailment effects, as well as further unintended consequences such as increased subletting. The only real solution would be to expand housing supply, potentially supported by loosening of planning regulations and increased public and private investment. However, this is an issue that successive governments have failed to truly solve for decades, allowing us to question whether any administration, be that incumbent or incoming, would have any greater degree of success.
For more information contact:
Sam Miley, Managing Economist and Forecasting Lead
Email: smiley@cebr.com Phone: 020 7324 2874
Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.