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The real reasons rents are rising – Rowntree

by: Richard Rowntree, managing director for mortgages at Paragon Bank
  • 24/07/2023
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The real reasons rents are rising – Rowntree
Concerns that increasing mortgage rates are having the greatest negative impact on pressured household finances have attracted growing political attention in recent weeks.

The Chancellor spearheaded the introduction of the Mortgage Charter for the owner-occupied residential market, prompting Shadow Chancellor Rachel Reeves to argue that the measures should extend to buy-to-let mortgages. 

There are concerns expressed by the Labour shadow team that landlords passing higher mortgage rates on is driving rental inflation, but the reality is far more nuanced than that and embedded in old-fashioned supply-demand dynamics.  

Zoopla data highlights the shift in the dynamic between available inventory and tenant demand became most apparent halfway through 2021, a time when the economy started to open back up after the long Covid lockdown. 

Tenant demand significantly outstripped available stock, a situation that has remained to this day. It was at this same point, late summer 2021, that we started to see the Office for National Statistics (ONS) rental inflation data head upwards.     

Noting that interest rates were still sub-two per cent around this time undermines the notion that it is the passing on of mortgage costs that are driving up rents. As does the fact that ONS figures point to rent inflation averaging around five per cent, which is far surpassed by other inflation metrics. 

Remortgaging at higher rates will, of course, be a contributory factor to the rental inflation story, but it certainly isn’t the main driver.  


A lack of supply pushing up rents 

There are just over two million buy-to-let mortgages outstanding and approximately 5.5 million properties in the UK private rental sector (PRS), meaning that around two thirds of properties are unencumbered and not subject to inflationary mortgage pressures.  

Additionally, around 200,000 buy-to-let mortgages are due to come off their fixed rate this year. If all those mortgages written five, three and two years ago are still live, which represents just 3.6 per cent of that 5.5 million total.  

Indeed, around a third of outstanding buy-to-let mortgages are subject to variable or tracker rates, but including these in the mix would still mean only approximately 16 per cent of PRS properties are subject to mortgage rate exposure.    

It is too easy to target landlords as the source of rental inflation without truly addressing the true cause, which is a lack of new homes coming into the sector at a time when demand will only increase.  


Lack of options for low income households 

Another important factor that appears to be absent from the debate is housing benefits that is failing to keep pace with rents.  

A study by the Institute of Fiscal Studies noted how freezing of local housing allowance (LHA) rates in cash terms resulted in the proportion of private rental properties that were completely covered by housing benefits falling from 23 per cent before the pandemic to just five per cent today.  

This change can be seen against a backdrop of a steady decline in the proportion of social and affordable rented property from 20 per cent in 2001 to 16.4 per cent in 2022. 

This highlights the emerging issue of too few affordable homes for those on low incomes.  

Despite the challenges of a volatile economy, we know that landlords, particularly the professional contingent who have been in the sector long enough to have weathered previous storms, recognise the need for the PRS to pick up the slack.  

As a sector, it’s up to us to find innovative ways to facilitate investment to meet this demand.   

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