Rental Market Update
Catherine Alexander
Partner and Mortgage & Protection Adviser at GDA
Access to housing remains important in the UK. There is an increasing demand for private rentals and therefore landlords will remain a vital part of the UK housing and economic landscape.
The share of households in the private rental sector in England has been broadly stable in recent years. This comes after a sustained period of rapid growth between 2000 and 2015, which saw the number of households privately renting more than double, from 2 million (10% of households) to 4.3 million (19% of households). This was more than twice the rise in the number of owner occupiers, which increased by 1.1 million between 2003 and 2023 (the number in the social rented sector remained broadly flat). Since 2003, the number of buy to let (BTL) mortgages outstanding has increased by more than 1.5 million, though the majority are still owned outright.
Since 2015, investment demand has slowed due to increased regulation, political uncertainty and tax changes. More recently, higher mortgage rates have made purchasing a property using a BTL mortgage less attractive. There has been a modest decline in the total number of BTL mortgages outstanding over the last year.
New Government, New Opportunities?
The new Labour government has pledged to build more homes, and this alongside reform of the planning system and changes to the tax system should give landlords the confidence to invest. By increasing suitable housing in cities, people will be able to put down roots and contribute to the economy and local business, in-turn ensuring the long-term sustainability of our cities. The Labour manifesto didn’t go into great detail on how the new government plans to handle the rental market, but it contained two important hints: a promise to “immediately abolish” section 21 ‘no fault’ evictions and to ensure that homes in the private rented sector “meet minimum energy efficiency standards by 2030”. Another key question is whether Labour will decide to make changes to CGT. But regardless of what the Labour government decides to do, the market remains challenging for mortgaged landlords. The impact of higher interest rates has been uneven across the sector. Since the majority of the rented stock is owned outright, most are insulated from the direct impact. However, for those with a mortgage, the significant rise in interest rates since late 2021 poses a major challenge, especially since most BTL mortgages are contracted on an interest only basis. Therefore, it is reassuring that, while mortgage arrears in the BTL sector have edged up in recent years, they remain at extremely low levels by historic standards.
Landlords and the Rental Market
There has also been a marked change in the ownership structure of the market and the composition of landlord portfolios. Data from the English Private Landlord Survey 2021 shows that just under half (43%) of all landlords owned one rental property – a significant shift from the situation in 2010, when almost 80% of landlords owned a single property. Similarly, the proportion owning five or more properties has increased from just 5% in 2010 to 18% in 2021 (the latter have a disproportionate role in the market since they account for almost half of all tenancies).
While house prices did not plummet last year, they are for now undergoing a slow and muted recovery – in June prices were up 1.5% year on year, according to the Nationwide House Price Index. Mortgage rates are expected to start decreasing again once the Bank of England makes its first rate cut, which is expected in the next few months. It is hoped that a combination of cheaper mortgages and high yields might stimulate appetite for BTL investments towards the end of the year, after a difficult period for the sector.
In London, more than 30% of households rent privately – almost double the proportion in the rest of England. London has traditionally had a higher share of renters, but the proportion of renting has more than doubled since 2004. This reflects the impact of intensifying affordability pressures for prospective first time buyers, where the price of a typical home in London is now twice the UK average. Indeed, the proportion of households owning with a mortgage in the capital declined from approximately 40% to 25% over the past 20 years.
Rental Market Outlook
Considering the state of the market and the political landscape, the outlook for the private rental sesctor is difficult to predict at the moment. Most people will be watching and waiting to see what Labour say over the summer, and then what they do in the Budget. However, tenant demand is extremely robust, and rental growth is strong. Moreover, with housing affordability stretched, many aspiring homeowners are likely to stay in rented accommodation for longer, so tenant demand is likely to remain solid.
References:
The Mortgage Works. Private Rented Sector Report. Summer 2024.
This article isn’t personal advice. If you’re not sure whether a course of action is right for you, ask for financial advice. Your home may be repossessed if you do not keep up repayments on your mortgage.
