A continued imbalance between supply and demand is set to grow rents by 6% next year, before hitting an affordability ceiling that will limit growth until 2028.
Savills predicts that the short supply of stock and tougher conditions for landlords will keep UK rental growth strong in the short-term, with 9.5% growth expected this year - higher than any other year on record – and taking total growth since the pandemic to 26%, according to Zoopla.
Rising rents are stretching renters’ finances, says Savills, which estimates that the average PRS household is spending 35.3% of their income on rent, up from 33% in 2021/22. This is even higher in the capital, at 42.5%.
Rents in the capital have grown 31% in the last two years, and as a result, renters have already exhausted their capacity to bid upwards. As a result, month-on-month rental growth has dropped from an average of 1.2% in 2022 to 0.6% in 2023.
Director Emily Williams says it’s very difficult to see where an increase in rental supply will come from in the next couple of years. She adds: “Higher borrowing costs will also keep would-be-buyers in the rental sector for longer, underpinning demand, and while some landlords will be able to transact in cash to avoid the higher cost of debt, this is unlikely to move the dial on supply. Any significant increase in stock in the sector will be delayed until 2026 and beyond, when interest rates have fallen more substantially.”
Struggles for individual private landlords suggest that institutional landlords and the build-to-rent sector will play an increasingly important role, however Savills says this depends on how easily schemes can get funding in a challenging debt market as well as their ability to get planning consent in an arguably even more challenging planning environment.