UK rental market feels the strain

This Thursday sees the Bank of England poised, once again, to raise UK interest rates. This will be the ninth successive meeting this has happened. Financial markets believe that the headline UK interest rate will go up by a further 0.5%, to 3.5%. This decision is far from assured. The nine-person rate-setting Committee is increasingly split on the correct prescription for the UK economy. Inflation remains painfully high – but economic growth has showed sharply in recent months. It is a backdrop no central banker would wish for.

When the Bank of England raises interest rates the media’s focus is inevitably on those with mortgages, business loans or, increasingly, the upside for UK savers.  This week’s interviews will once again seek out these three groups. However, there is a fourth group – less obviously impacted – who will be watching on nervously. It will be those that rent their own home.

Trends in the rental sector often get drowned out by mortgaged homeowners despite there being more than ten million households renting their home, compared to fewer than nine million mortgaged homeowners. An example of this imbalance can be found in the Bank of England’s latest Monetary Policy Report that summarised the outlook for the UK economy. There were fifty-eight individual references to “mortgage”. There was not a single one to “rent”.

The Bank of England may not yet think the rental market is worthy of comment, but this is an issue of growing importance in government. Rents across the private and social rented sectors are now going up by 4.3%. This is the fastest rate of rent inflation since 1996. The UK is also not alone in seeing strains in its property rental market. In the US rents are up by 7.5% over the last twelve months. In the Eurozone rent inflation is running at a 15-year high. Furthermore it is likely that this inflation will prove stubborn as tenancies and rent reviews agreed prior to the recent surge in inflation are steadily renewed to reflect the reality of higher maintenance costs and landlord’s elevated mortgage costs.

So why is this inflation now taking hold? As the global rental market is also seeing price increases it is important not to be too UK-centric in our diagnosis. As well as those higher landlord costs across all major economies, we are seeing workers change where, and how, they want to live in a world where workplace trips are still down around 15% from pre-pandemic levels. The housing stock is notoriously slow to adjust to new patterns in demand. This introduces a scarcity premium to rents in many sought-after locations. There is also now a widespread fear that house prices will continue to fall as mortgages become more expensive, and economies slow. This has encouraged would-be homeowners to try and sit out any house price crash in the rental sector.

But there are also some domestic influences that are amplifying these global trends. The first is a looming regulatory change where, from December 2025, new tenancies will only be permitted on energy-efficient homes. It is estimated that 70% of UK landlords own a rental property with a rating below the standard required. The cost of retrofitting is estimated to be an average of £8,000 per property. Renters are, at some stage, going to be footing this particular bill. The second impact is recent tax changes that reduce the financial incentives to be a landlord. Whilst the government is very clear that it wants to release such rental stock for home ownership, this transition is not proving a smooth one. Its immediate impact has been to reduce the available stock of rental properties.

So what does all this mean for the Bank of England? Stubborn inflation in household rent means a pivot away from further interest rate increases will be tricky. It also sucks disposable income away from households who are being relied to spend on discretionary items to keep the economy and jobs market afloat in 2023. Understanding how the rental market evolves from here is an important variable for economic stewards to understand. Its current status as the poor relation to home ownership is making this job harder.

Simon French

Managing Director, Head of Research