Towering Rents of UK rental towers

Aivanaa Maraea
February 14, 2024
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Over one in five of UK households rent their accommodation privately and almost as many are in the social rented sector. In the past year, private rents have increased so dramatically that many young renters have been forced to move back in with their parents. The easiest conclusion to draw would be that this is due to the greed of landlords, who have increased the rents they charge despite the widespread suffering caused by the worst inflation in decades. However, the data show otherwise. In fact, most individual landlords are now making losses on their buy-to-let investments and some are even being forced to sell their properties in a weak economic environment as they are unable to afford the dramatic increase in their mortgages. This article aims to evaluate the real causes of the trauma faced by millions of UK families.  

More Demand, less supply

Clearly, in a market economy, the prices of privately traded goods and services are determined by the demand for them versus their available supply. The private rental market is not very different. Any landlord would probably want their property to be rented out at the highest possible rent.

private rental price percentage change over 12 months in english region to december 2023
Source: ONS²

Tenants offering higher than the asking rent

In London, the number of potential tenants that register to view a property the day it is put on the market for rent can easily reach a dozen, with more than two offers often coming in at or above the asking price within a few days. It is tenants who most desperately want to move into that location that offer the highest rent. Rental properties can get thus snapped up within days of being put on the market. The letting agent then takes the latest rental value into account when putting the next rental property on to the market. Asking prices can thus keep going up. Strangely, it is tenants who are driving rents up consistently in the UK, particularly in London. And to differentiate their applications, tenants are offering 6-12 months’ rent upfront and providing their CVs to landlords.

private rental price percentage change over 12 months in uk from january 2016 to december 2023
Source: ONS²

Local high demand

If rents offered by tenants are higher than the asking rent, this does not necessarily mean that the rent originally quoted by the letting agent was underpriced. It could simply be that tenants may have experienced rejection of their offers previously and hear horror stories about those who have not found a suitable property and may face homelessness. Thus, idiosyncratic local factors can come into play when the number of available rental properties are few. This is particularly true for areas that are normally occupied by homeowners. If you are a family renting a property in a residential area, there is a good chance that your children go to a school locally and you have an acceptable commute to work. Perhaps an elderly family member who requires care also lives close by. If your landlord does not want to renew your tenancy,  factors mentioned above may force households to remain in an area where not that many properties come up for rent and being desperate to secure a rental property locally, they end up offering higher rents for those handful that do come up.  

Reduced Supply

According to an article published in the Guardian1, there were 43% fewer homes available for tenants to rent by October during the year 2023 than there were during the same period in 2015. The ownership of rental properties is also increasingly moving from individual landlords to investment institutions; according to the same article, individual landlords have sold 294,300 more homes than they have bought since 2016. Changes in the mix of ownership have changed rental levels. Many buy to let landlords have sold in the recent past to owner occupiers. In some areas, this has reduced the supply of properties available for rent sharply. Institutional investors, in particular, are driven by the level of rental income as a proportion of property price (or “gross rental yield”) rather than the “prime”-ness of the location of the property. The gross rental yield in prime areas of London is often as low as 2%, whereas it can be a multiple of that as you go outside London.

Are private landlords profiteering from increased rent?

NO.

Source: Savills Research³

On the contrary, thousands of landlords have decided to sell their Buy to Let properties because it no longer makes economic sense to hold on to them. They have been suffering from “Negative Carry”, which means they are making a net loss (or negative income) after deducting costs, including interest and tax, from the rental income derived from the property. This has resulted in a reduction of the number of rental properties in the market, contributing to the reduction of supply. The main cause of Negative Carry is the increase in the mortgage interest cost that spiked to a multiple of what it was about 18 months ago. However, this is not the only cause.  

Cause: Tax Policies

UK governments have systematically introduced fiscal policies to discourage investors from buying UK residential property, thereby curbing the increase in house prices. Such policies include a change in the stamp duty land tax, capital gains tax and income tax.  An additional stamp duty of 3% is applied if one acquires a property in addition to one’s principal private residence. Overseas investors who were exempt from capital gains tax are now subject to it.  

Buy to let landlords typically invest in residential property to gain from an increase in the value of their property while gaining a rental income that at least covers ongoing costs, including interest and taxes.  

However, whilst landlords were previously able to deduct the entirety of their interest cost from rental income for tax purposes, now the interest cost is income tax deductible only at the basic rate. Despite making losses after deducting skyrocketing interest costs from their rental income, buy to let property owners face a tax bill on their rental income.  

Cause: Cost to Landlord

Whether it is the increase in the cost of owning a property because of higher stamp duty or the increase in mortgage interest costs or an increase in taxes, all these factors have made buy to let investment a lot less attractive. Hence, fewer rental properties are coming to the market. With the supply of buy to let properties dwindling in relation to demand, rents are increasing and causing significant stress to renters.  

Solutions

While the intention of the government was to keep the property prices in check especially with a view to allow first time buyers to get on to the property ladder, any intervention through fiscal or monetary policies often also tends to have some unintended consequences; the current rise in rents is exacerbated by government policies implemented in the recent past.  

A better way of tackling house price appreciation would have been to enable greater housing availability rather than drastically reducing the profitability of buy to let investment properties. The government should now work towards facilitating planning permission for the building of well-designed townships within commuting distance of major employment hubs and high speed commuter train links, such as Crossrail, between the two. These are obviously long term solutions, but  work must start now for a better future. Not everyone should be expected to own a property; some of us may just want to rent affordably to preserve flexibility.

FAQs

Q: Why are rents rising so fast in the UK?

A: Several factors have contributed to the rental increases - increased tenant demand, limited housing supply, and landlords getting squeezed out of the market due to rising mortgage costs and tax changes being some of the key ones.

Q: What are the consequences of high rents?

A: High rents are causing financial hardship to families already struggling with the cost-of-living crisis leading to displacement from communities, negative impact on mental and physical health and in some cases homelessness.

Q: What can I do if I'm struggling to pay my rent?

A: In the first instance contact your landlord. Alternatively seek help from housing charities (Shelter, Citizens Advice etc), and explore government support options.

Q: What can the government do to address the housing crisis?

A: The government could aim to meet its own target of constructing 300,000 new homes each year which could help ease the pressure. They could also review tax policies affecting landlords, while potentially  offering better security for tenants.

Q: Will rents ever go down again in the UK?

A: Experts are already predicting moderation in rent increases in the UK in 2024, but not necessarily significant decreases. Investing in new housing could be crucial for long-term stability.

References:

1.Landlords sell up in Great Britain as buy-to-let market sours | Renting property | Release date: 13 November 2023 | The Guardian
2.Index of Private Housing Rental Prices, UK: December 2023 | Release date: 17 January 2024| ONS
3.Article Mainstream Rental Forecasts | Published on: 08 November 2023 | Savills

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