Rental market to turn in 2024
A chronic mismatch between supply and demand has been the defining feature of the private rental market for 3 years. UK rents for new lets have risen by a third - or £3,360 a year - in this time.
Rental growth has now peaked and we expect a major slowdown in 2024. Demand will moderate in the face of worsening affordability and as supply of rental homes improves slightly.
There are already signs that rents in some markets have been set too high as renters show resistance to higher rents.
UK rental growth drops to 9.7% with biggest slowdown in London
UK rents have risen +9.7% in the last year, compared to +11.9% growth the year before. However, current growth is still higher than earnings growth of +7.9% (ONS - September 2023).
Rental growth has slowed the most in London, from +17.0% a year ago to +9.0% now. Rents in other regional cities are holding up because renters can still afford increases based on average earnings.
Rents in Scotland are up +12.9%, which is higher than the +11.4% last year. Landlords are setting higher rents to allow for the government’s +3% per year cap during the tenancy. This shows how rent controls can be counterproductive.
The cheapest places to rent a home in December 2023
Economic and financial climate reducing rental demand
There are 4 main reasons for strong rental demand in the last 3 years:
The reopening of the economy and international travel after pandemic restrictions lifted in mid-2021
The strength of the labour market and good employment growth
Higher mortgage rates since autumn 2022 making home ownership more expensive
Record levels of immigration and particularly high numbers of overseas students
But there are signs the combined impact of these factors is starting to plateau.
Our Rental Index shows that demand has been steadily slowing in the second half of 2023. The number of rental enquiries per home for rent is down year-on-year, after peaking in summer 2022.
The graph shows a smaller summer peak this year and we’re now in the usual winter slowdown that will last for the first few months of 2024.
A change in 3 of the 4 factors are contributing to this:
The one-off pandemic effect is wearing off
Employment growth is slower and there are early signs of slower income growth (ONS, November 2023)
Mortgage rates are coming down a little, making buying more attractive than the current high rents for first-time buyers.
It’s worth noting that UK rental demand is still 32% above the 5-year average. Demand in London is down 20% year-on-year but above the 5-year average.
So we’re not going to suddenly see supply levels meet demand any time soon. But the market will become more balanced than any time in the last 3 years.
Asking rents are being reduced to attract tenants
A key sign of demand and the impetus for rental growth is how much asking rents are reduced to attract a tenant.
The number of homes having their asking rent reduced is now at the same level as the second half of 2020. That was when the pandemic hit rental demand, supply expanded and rental growth slowed.
There are the most asking rent reductions in London, with 10% of listings reduced by 5% or more in November 2023. The rest of the UK excluding London is at 7%, the highest for more than 5 years.
This shows the strong rent growth since 2020 is now meeting resistance. In many cases, renters cannot afford to pay higher rents.
Asking rents are being reduced in all price bands, with a spike in the £1,000 to £1,500 per month bracket.
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UK rents to rise by 5% in 2024 but only 2% in London
The rental market will continue to cool in 2024. Rental growth has peaked and it will slow down further.
Demand from renters will continue to drop as many cannot afford further large rent rises amidst other affordability pressures.
We expect London rents to slow to around +2% growth in 2024 as rents are highest and affordability is lowest in London. The average renting household in London (1.25 people) already spends 40.4% of their earnings on rent compared to a UK average of 28.4%.
However, an underlying lack of rental supply will keep rents rising across the UK in 2024. This is caused by low investment from landlords in the face of more regulation and higher mortgage rates.
There is also some headroom in affordability in cheaper markets, where tenants could afford more rent than they are paying.
These factors mean we expect rents to rise by between +5% and +8% across the country (outside London) in 2024 - faster than anticipated earnings growth.
Previous Rental Market Reports
See more news from our Rental Market Report
Our Rental Market Index is a repeat transaction index, based on asking rents and adjusted to reflect achieved rents. The index is designed to accurately track the change in rental pricing for UK housing.