Budget Seeks to Tame Inflation but Sets Stage for Higher Rents

For a government so concerned about inflation, it appears relaxed about the prospect of rising rents.

In last week’s Budget, the Chancellor announced a two-percentage point increase on rates of rental income tax. Savings and dividend income will be increased by the same amount.

There were disinflationary measures in the Budget, including on energy costs and rail fares, but tenants must now be left wondering if their overall monthly outgoings will increase.

The economic rationale is simple. As the tax burden on landlords increases, more will sell, supply will fall, and rents will rise. For those landlords that remain in the sector, any extra costs may need to be passed on.

In the words of the Office for Budget Responsibility alongside the Budget: “This successive eroding of private landlord returns will likely reduce the supply of rental property over the longer run. This risks a steady long-term rise in rents if demand outstrips supply.” 

Our full Budget round-up can be found here.

There is already evidence of upwards pressure on rents in prime London markets.

Average rental values in prime central London (PCL) increased by 1.8% in the year to November. In prime outer London (POL), there was a rise of 2.2%. 

A November High

Taking out the distortive effects of the pandemic, it was the highest November reading in PCL since 2014. On the same basis, rental value growth in November was last higher in POL in 2011.

Other changes on the horizon include the Renters Rights Act, which will create uncertainty around setting rents, repossessions and the sale process for landlords when it comes into effect in May.

“In the majority of cases, landlords are happy to manage the changes the Renters' Rights Act is bringing, but further margin erosion from an already low base will drive them away from the sector,” said Gary Hall, head of lettings at Knight Frank. “Losing control of an asset that isn't generating any return is far from a good investment, and one that will be sold quickly.”

The growing financial burden means more landlords are exploring the option of setting up a company, although that is not a straightforward process, as discussed on a recent episode of Housing Unpacked with Nimesh Shah, the CEO of tax advisory firm Blick Rothenberg.

That said, for those landlords staying in the sector, rental yields are increasing as a result of rising rents and price declines, as we explored last month.

Rental value growth has been particularly strong in recent years, due to the pandemic and supply shortages. New rental listings in PCL and POL in the first ten months of this year were 9% below the five-year average, Rightmove data shows.

Average rents have risen +35% since November 2019 in prime central London, which compares to a figure of 2% over the preceding 6 years.

In POL, rental value growth of 33% over the same period compares to just 8% in the six years prior to Covid.

Tenants were already feeling squeezed before the Renters Rights Act and this November’s Budget made the outlook tougher.