Rental inflation, and the supply / demand mismatch
As you know, the Bank of England recently hiked interest rates for the thirteenth time since December 2021, taking the base rate to 5%.
Clouds are thickening over the new mortgage market while many existing mortgage holders face real challenges to meet their obligations.
We unpacked some new-mortgage-how-to in a recent Money Means blog, and we noted there that renters are also under the cosh – which we’ll explore in more detail today.
The Hunt for solutions
A little more on the mortgage latest, UK Chancellor Jeremy Hunt last week met UK finance and banking chiefs to agree a package of measures to support borrowers in a bad spot. Of the seven measures announced, some apply to all lenders while others will be adopted by agreement and currently some 85% of lenders are on-board.
We won’t run through all seven (some were already in play anyway), but it’s notable that one new measure means borrowers can talk very frankly with their bank or lender without that conversation impacting their credit score.
Another allows mortgage holders to hop onto an interest-only deal, or to extend their mortgage term, but to switch back to their original mortgage within six months – no questions asked and no impact on credit scores.
Notably, people at risk of losing their home will be given a minimum of 12 months grace before a repossession order be executed without consent. For more, here’s our last email on mortgages from two weeks ago, and we’d recommend you speak to your lender or a broker for detailed info.
While the response to mortgage measures has been lukewarm, there is precious little for the circa 20% of the UK (well over 5m people), who rent their property privately …
Rental inflation
To state the obvious, private renters pay rent to a landlord so the landlord can cover their own mortgage costs with a little cherry on top. According to government data, over 60% of landlords have live mortgages …
So escalating mortgage costs, by definition, can’t not hit the rental market. Zoopla’s June Rental Market Report puts annual rental inflation at 10.4%, and found that rents have been growing faster than average earnings for nearly two years.
Rental affordability is at its worst for a decade in seven of the 12 UK regions.
Average UK rents now account for 28.3% of a tenant’s pre-tax earnings. Although that’s just a 1.3% increase on the 10-year trend nationwide, it varies wildly by location. The average London tenant, for example, now spends 40% of their pre-tax earnings on rent.
Supply, demand, outlook
Zoopla notes that mortgage rates are hitting hardest for the 20-30% of landlords who have the largest loans, so again that’s primarily London and the South.
Although it says reports of a ‘landlord exodus’ are overblown, roughly half (51%) of all landlords selling up are in London and the South East – making an expensive situation there even worse given shrinking supply and swelling demand.
Demand for rentals also tends to increase in the late summer months (by as much as 40%), so limited supply will likely keep prices high. A big influx of new properties would help matters but that’s highly unlikely. Rental stock has been in slow decline for years.
So is it all doom and gloom? Well, some commentators expect rental inflation to curl back to circa 8% in 2023 – an improvement on the current 10.4% but still higher than expected.
And while affordability pressures may limit price increases in some areas, there’s a sense that the sprawl effect (when people can’t afford their A1 location they’ll try to rent in A2 or A3) will lead to price growth across an even wider geography.
What can I do?
Renters can’t do an awful lot to make the situation much better, unfortunately. Aside from practical moves and compromises to save on rent (downsizing, house shares, subletting, moving in with parents and so on) the market is the market.
Still, it definitely pays to know your rights as a tenant, and this page on the government website is a good place to start.
It’s also worth checking prices for other local properties to ensure your rent is in step with the rest of the area, and that any price increases are fair versus what’s going on nearby.
Assuming you’re a good, reliable tenant who pays on time then some unscientific advice would be to use those qualities if and when you engage with your landlord. Personal experience says that landlords prefer stability and a good working relationship with tenants above all other things.
So use your existing relationship and your history as a good tenant to your advantage and be sure to keep communications with your landlord regular and open. If rent rises are coming down the pike, you want as much notice as possible to get your ducks in a row.
Sorry it’s not better news
This sounds like an odd platitude to end on, but it’s true. We simply can’t touch on the mortgage / interest rate / rental situation without getting knee deep in the bad stuff.
As much as Money Means want to cover a broad smorgasbord of content and topics, this is the hand we’re being dealt right now.
But storms have come before and they will again. Nothing is permanent. So keep hope, stay focused and stay close, we’ll ride this one together.
Like what we do? Tell a friend, plug us on social, or send us a note … there’s no inflation on any of those things …