Rental growth is close to peaking – Zoopla
Rents have increased by 12.3%, or £115, per month since last year, pushing the average rent up to £1,051 in July, according to Zoopla’s UK Rental Market Report for Q3 2022.
“The chronic shortage of homes for rent and strong demand is pushing rents higher,” Richard Donnell, executive director of research at Zoopla, said. “Renters are adapting their strategies and starting to seek out smaller homes at lower rents and running costs.”
The Zoopla report found that the stock of homes for rent remains almost half the average compared to the last five years. The average letting agent has just eight homes available to rent, only half that of the summers of 2017 to 2019. The flow of new homes to rent is running 7% below the long-term average, as renters stay put to avoid rent increases.
Rental growth is also outpacing earnings growth in all regions and countries of the UK. Rents are rising quickly across all parts of the UK, ranging from 7.6% in the North East to almost 18% in London. The capital registered a rental growth rate of 17.8%, reflecting a rebound in rents after a double-digit decline over the pandemic.
Read more: Demand for city rentals high as workers return to offices.
But while the annual rental growth rate has accelerated over the last 12 months from an annual rate of less than 2% in July 2021, Zoopla noted that this growth is starting to plateau.
“In London, the rental growth pace is simply not sustainable,” Donnell pointed out. “Current growth figures reflect the rents rebounding off a low base, after a 10% fall during lockdowns. Average rents in London are currently 7.8% higher than before the pandemic, compared to the UK-wide average of nearly 13%.”
Zoopla added that another noticeable trend is rental growth in urban areas across England (10.5%), which is outpacing that of rural markets (8.5%) as strong employment growth drives demand in cities. Higher levels of new-build supply concentrated around city centres is also becoming more appealing to renters looking for smaller homes with lower running costs.
Private renters living in the Midlands and northern regions found rental costs easier to pay than those in the South. In addition, a higher proportion of renters on lower and middle incomes were finding rents difficult to pay.
Meanwhile, asking rents for two-bed flats are rising faster in the top 25% of the market, with growth lagging across the bottom 25% of the market, where demand is more price sensitive. For three-bed houses, there is less of a difference, but, in many regions, the asking rents in the more affordable segments are rising faster.
As rented family homes become less attainable, Zoopla said demand for two-bed flats continues to climb with renters looking for better value for money. This shift to smaller homes is being re-enforced by rising energy costs, with the gas needed to heat a purpose-built flat 40% lower than that for a three-bed house.
Read more: Rising rents cause tenants to lose a bedroom – Hamptons.
According to Zoopla, the lingering undersupply of rental homes in the UK shows no sign of changing, which means that rents will continue to post above average growth rates into 2023 despite cost-of-living headwinds.
“There is no real prospect of a significantly improved rental supply in the near term, as private landlords continue to sell off homes and renters stay put for longer,” Donnell said. “Higher mortgage rates will compound the pressure on demand, making it harder for would-be first-time buyers to stop renting and purchase a home.
“There is headroom for some renters to pay more - especially outside of London and the South East – where rental affordability will remain a drag on demand. We expect rental growth to slow over Q4 and into 2023, but it’s unlikely to happen quickly.”