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Rental Price Increase
Ultimately, it is low supply and high demand that are aiding higher rental costs. However, to counteract higher mortgage rates, existing landlords are also increasing rental prices to profit more from their investments.
The pace of rental prices is increasing much faster than house prices. As of August 2023, average house price inflation reached +0.1%. Compared to August 2022, a new record of +5.5% was reached for rental price increase. This record is predicted to be broken again by the end of the year, reaching 6.5%.
Such a figure has been estimated by estate agent, Knight Frank. They have furthered their predictions by forecasting the rental price increase over the next 5 years. The 6.5% at the end of 2023 will be followed by a 5% rise over 2024. It will grow again by 3.5% the following year, then 3%, and finally 2.5%. By 2027, rental prices will have increased by 22.2%.
London Property Market
London is seeing a steeper rent price increase. Instead of the first predicted 6.5% increase for the UK, London’s rental market will likely receive a record-high 8% growth by the end of 2023. A further growth of 5% in 2024 will follow this, then a 3% growth in the years after. In all, London is forecast to see a total 23.3% rental price increase over the next 5 years.
Between July and September 2023, according to Rightmove, the average UK rent cost £1,278pcm. London’s average rent reached an average of £2,627pcm. Compared to the same period last year, rent prices have increased by 10% outside of London and 12.1% within the capital.
Supply and Demand
This projected increase in UK rental prices is due to many factors, but mainly the housing supply and demand imbalance. Because of current mortgage rates, first-time buyers are decreasing. This alongside the supply shortage increases rental demand. The strength in job creation contributes to demand, too. Due to this, rental prices increase.
As for London, its imbalance of supply and demand will take longer to correct. Due to recent higher costs and taxes, some landlords have either sold up and left the property market or have chosen to invest in more affordable areas.
In 2019, estate agencies would usually have 6 requests for a rental property. However, this figure became 20 in spring 2023. Now, just after 5 months, the average number of enquiries sits at 25. This is three times more tenants than in 2019, and a considerable queue for viewings. It truly shows the supply and demand imbalance.
In all, tenant demand has soared since the higher mortgage rates placing home ownership further in FTBs’ plans and leading some landlords to sell their buy-to-let properties, as well as the return of students after the COVID-19 pandemic. While supply remains low, hope is certainly on the horizon. The number of rental properties marks the highest level since December 2022, which is a fantastic sign of easing pressure between supply and demand.
Advice for Investors
While some investors may think areas with higher rental costs have higher demand, they are mistaken. London has the largest rental price increase in the 5-year outlook while remaining more affordable to rent than buy a property. The average cost of renting a single room in the capital recently exceeded monthly payments of £1,000. With the 5-year outlook predicted for rental costs, this will only rise.
Due to the cost of living in London, many buyers and tenants will leave the capital in search of more affordable locations. Yorkshire is fantastic for property investment. The North East, too, currently offers the lowest rent in the UK, averaging at £649pcm. However, some of the country’s largest cities north of London provide the best value for money. The likes of Birmingham, Liverpool, Sheffield, and Bradford offer average rent below £900, which is highly desirable for tenants. Yorkshire, too,
The North is home to significant capital growth due to investments into regeneration and migrating businesses, as well as having some of the best rental yields in the UK and more affordable properties. Regions north of London experience more desirability and affordability and see increased tenant demand for such.
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