Calling time on the UK rental boom

The UK rental boom is over, Zoopla declared this morning. The average rent for new lets increased just 2.8 per cent in the past year, the lowest rate of growth since 2021.

This will come as little solace for tenants, who have seen rents climb by more than a fifth in the past three years. The acute nature of the supply and demand imbalance is easing, but not to a degree that will prompt rents to fall; the number of people looking for a rental home is down 16 per cent, but remains about 60 per cent higher than before the pandemic, according to the Zoopla figures. Similarly, there are 17 per cent more rental homes on the market than there were this time last year, but that's still a fifth lower than in 2019.

Tax breaks

Regulations and tax are at the core of the problem. More than a quarter of landlords sold off at least some of their portfolio last year, the highest on record, the National Residential Landlords Association reported in February (see chart). The degree to which this shrinks total rental stock is a source of contention among economists, but we can all agree that it's not helping. The data does suggest that the majority of properties sold by landlords aren't purchased by other landlords and relet. During the final quarter of last year, for example, about 12 per cent of new sales instructions were properties that had been rented out at some point in the last three years, but only 2.9 per cent were subsequently relet, according to TwentyEA figures.

Solutions are few and far between. The English Housing Survey consistently shows that the private rented sector has the highest proportion of homes that fail to meet the Decent Homes Standard, so it's right that the government is seeking to improve standards, but it's hardly surprising when investors move to assets with more attractive risk-adjusted returns. Ministers could start dishing out tax breaks again, but that won't be popular.

Fixes that do exist will take years or even generations to come to fruition. A proper stock of social housing is clearly vital, but that sector has insufficient funding. The government’s Affordable Homes Programme was recently "topped up", including a £2 billion injection expected to deliver 18,000 homes, primarily for social rent, but research by Legal and General and the British Property Federation suggests that grant funding would need to increase by up to £14 billion per year to deliver affordable housing at the necessary scale.

Chancellor Rachel Reeves will deliver a spending review today - I'm writing in the hours leading up to the statement - and reporting in the Mirror suggests we'll hear about plans to spend £39billion on a new affordable homes programme over the next decade. That will include a 10 year social rent settlement at 1% over CPI. National Housing Federation chief executive Kate Henderson called the package "transformative", and we'll await the details before saying more. Previous announcements haven't quite stood up to scrutiny. 

Much bigger

The build-to-rent sector offers real potential, but progress is being slowed by the Building Safety Act, which has introduced longer delivery timelines due to new approval gateways and capacity constraints at the Building Safety Regulator.

Just two per cent of private rented sector homes are held by institutions, with the remaining 98 per cent in the hands of private buy-to-let investors. Our analysis suggests the BTR sector has the potential to account for at least 30 per cent of all privately renting households across the UK at maturity – equivalent to nearly 1.9 million purpose-built rental homes. The suburban rental market is particularly underdeveloped; we think there's potential for more than 1 million single family housing (SFH) units alongside nearly 850,000 multifamily apartments, including co-living. These figures are based on current demand and the potential will only grow in line with population growth – see Lizzie Breckner's recent piece for more.

The reopening of the Private Rented Sector Guarantee Scheme will help. Our analysis suggests that the nearly £2 billion made available through the scheme could support the delivery of more than 13,000 new BTR homes, representing around 12 per cent of currently consented BTR homes, but the government needs numbers that are much, much bigger.

Robust selling

In the meantime, the balance of the property market will continue to shift. A 20 per cent rise in rents in the most recent three years has corresponded with a 4 per cent rise in capital values, making purchasing a much more attractive option in relative terms.

The mortgage market is fiercely competitive, and the lenders recognise that securing business from former renters will be among the most promising sources of new market share. They have been tweaking affordability criteria, extending terms and doing more business at higher LTVs as a result – the share of lending with LTVs exceeding 90 per cent hit 6.7 per cent in the first quarter, the highest proportion since 2008, the Bank of England reported on Monday. 

That's acting as a tailwind for the housebuilders serving these markets. Bellway yesterday announced it expected to sell between 8,600 and 8,700 homes in the year through July, up from previous guidance of "at least 8,500" and an improvement on the 7,654 homes sold a year earlier. 

"Trading through the spring selling season has been robust, with good levels of customer demand and improved affordability supporting a sustained increase in private reservations compared to the first half of the financial year," the company said.

In other news...

Planning approvals for new homes in England drop to 13-year low (FT).