According to Zoopla, higher mortgage rates are forcing would-be buyers to rent for longer and dampening landlord investment.
The firm found that UK rents rose 2.6% in the year to June to average £1,340, up from a growth of 1.6% in the year to February. It predicted that rental growth would be around 4-5% by the end of the year.
The number of homes available to rent has fallen by 3% year-on-year, the first drop in supply in three years.
Zoopla said rising mortgage rates had made home purchases harder for first-time buyers, leaving more of them renting and therefore pushing up demand. Meanwhile, the rental property supply has slowed, with a 6% fall in August.
Higher rates have also impacted landlord investment, along with tightened regulations and rising costs.
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This decline in rental homes began in May, Zoopla found, ending a three-year recovery in rental supply that contributed to easing rent rises in the last two years.
Zoopla said demand for rented homes usually rose between July and September, but rising mortgage rates this year had added to demand, particularly in London. Currently, the number of enquiries for each rental listing is 6% higher than last year, at 5.3 enquiries per listing, the highest level in nearly two years.
Tom Bill, head of UK residential research at Knight Frank, said: “Rising mortgage rates are exacerbating the imbalance between low supply and high demand in the lettings market as more tenants stay put. That follows years of tightening supply as landlords left the sector due to a proliferation of red tape and taxes.
“For those who have stayed, the Renters’ Rights Act has aggravated the situation further, with some landlords setting asking rents higher to compensate for the increased risks they face around void periods, rent collection and regaining possession of their property.”
Areas with low rental supply see higher costs
Zoopla said that across the country, rents rose faster where there were the most declines in available rental properties.
The firm said higher rates were attributed to a lack of supply rather than a notable rise in demand. London was the only region where rental supply and demand were tightening at the same time, Zoopla found.
The largest rent increases were recorded in London and the Yorkshire and the Humber regions, while both saw falls in supply with declines of 6% and 12% respectively.
However, the sharpest slowdown in rental growth was seen in Wales, where there was a 7% boost in the number of homes available for rent.
Zoopla disputed the idea that this was because of the Renters’ Rights Act implementation in England, as it saw a similar trend of falling rental supply and higher rents was also seen in Scotland.
Richard Donnell, executive director at Zoopla, said: “The rental market is starting to tighten again after three years in which the supply of homes for rent has steadily improved and rental growth slowed easing the pressure on renters. Our latest report shows how sensitive the rental market is to even modest changes in how many homes are available for rent.
“Higher mortgage rates are not just impacting the sales market, they are keeping more would-be first-time buyers in rented homes for longer, reducing available supply just as the seasonal upturn in demand gets into full swing. This is pushing rents higher again, mainly in regions where the availability of homes for rent has declined the most, although affordability remains an important constraint on how far rents can rise.”
Donnell added: “The upward pressure on rents is greatest in London, where higher mortgage rates have had the biggest impact on homebuyers, and in more affordable rental markets where renters have greater capacity to absorb increases. Low levels of new investment by landlords and renters renting for longer mean we expect UK rents to increase by 4-5% by the end of the year.
“Growing the number of homes for rent through increased investment is the most sustainable route to boosting choice for renters and ensuring stability in rent levels over the long run.”
Jeremy Leaf, North London estate agent and a former Royal Institution of Chartered Surveyors (RICS) residential chair, said: “We are not surprised to hear that the pace of rent increases is picking up again, as this confirms what we have seen in our offices over the past month or so.
“Some landlords are selling up when tenants decide to end fixed-term agreements, as they are worried about the time it is likely to take to gain vacant possession under the Renters’ Rights Act. For many, this piece of legislation is the final straw on top of the ongoing tax and regulatory burden.
“Landlords are not being replaced fast enough – if at all – which would otherwise keep rents in check.
“Rental demand has been supported by aspiring first-time buyers in particular, who are staying put in rented accommodation for longer due to uncertainty in the sales market. This is resulting in an inevitable further upward pressure on rents.”
