Renters Will See The Amount Spent On Rent Grow Faster Than Earnings In The Years Ahead, Even As The Surging Cost Of New Tenancies Cools

8th April 2024

Britain's recent exceptional surge in new tenancy rent levels - up by almost a fifth over the past two years - is coming to an end, but average rents could rise by 13 per cent over the next three years, as today's high market rates work their way through existing tenancies, says new Resolution Foundation research published today (Monday 8 April 2024).

Through the roof - Recent trends in rental price growth examines what lies behind the recent rents surge, sets the record straight on some commonly-suggested causes, and shows what this could mean for the coming years.

The cost of new tenancies has grown by 18 per cent since January 2022. This has had a big effect on families' living standards, with the number of families privately renting almost doubling in a generation - from 11 per cent in the late 1990s to nearly 20 per cent today.

Private renting is also no longer the preserve of those in their 20s. The proportion of poorer families headed by someone aged 30-49 that are renting has almost tripled from just 11 per cent in the mid-1990s to nearly 30 per cent in 2021-22.

Turning to what has driven the recent rent surge, the Foundation says that popular arguments are wide of the mark. The theory that rising interest rates have pushed up the cost of servicing Buy to Let mortgages - forcing landlords to pass on these costs to their tenants - ignores the fact that landlords' ability to pass on higher costs is ultimately constrained by the wider rental market. If it were so easy for landlords to unilaterally choose to increase rents, they would likely have done so before 2022, says the Foundation.

There have also been scare stories about interest rate rises and tougher regulation sparking a mass exodus of landlords from the Private Rental Sector (PRS), reducing the supply of available homes. However, the Foundation's analysis of Bank of England research shows that there has only been a very modest shrinking of the PRS since mid-2019, equivalent to just one per cent of the sector.

Instead, the Foundation says, the main causes of Britain's private rents surge is a bounce-back from the pandemic and more recently fast rising wages. The Foundation notes that rents tend to track wages over the long-term - and that average private rents have remained roughly constant as a proportion of average earnings since 2000.

However, the disruption caused to the rental market by the pandemic, during which evictions and repossessions were halted, meant that rent levels fell to their lowest level on record relative to earnings, and, by early 2022, were nearly 5 per cent lower than what a long-term trend would suggest. Some of the recent surge in rental prices is therefore a post-pandemic ‘correction', returning the UK’s rent-to-earnings ratio to its long-term trend.

This post-pandemic catch-up has been compounded by historically high nominal earnings growth in recent years, with average earnings rising by 13 per cent since the beginning of 2022.

There is some good news on the horizon: with that catch-up now done and pay growth cooling, the surge in rents for new tenancies should come to a close. In fact, market rents for new tenancies have already begun to cool, falling from annual growth of 10.4 per cent in June 2023, to 7.5 per cent by March 2024.

However, the Foundation warns that although growth in rent levels for new tenancies is cooling, it could take years for the burst of growth we’ve seen to make its way through the whole private rental sector. New renters will pay these new higher rents, while existing tenants reaching the end of a tenancy or forced to accept within-tenancy price rises, will in future face large rent hikes.

If we assume average rents paid will return to their pre-pandemic level compared to earnings in three years’ time, then rents (for all tenancies) would see over 13 per cent price growth over that period (or 4.2 per cent a year on average), much faster than the 7.5 per cent growth in average earnings (or 2.4 per cent a year on average) forecast by the OBR over those years.

This means there are significant housing cost rises yet to come for many renters over the next few years, and estimates of rental price inflation across all rental properties - rather than just new lets – will remain high for some time yet.

Cara Pacitti, Senior Economist at the Resolution Foundation, said, "Millions of families agreeing new tenancies across Britain have faced surging rents in recent years, as we have emerged from the pandemic. Those rises for new tenancies are starting to slow, but how much renters actually pay will continue to outgrow how much they earn for some years to come as those not yet exposed to higher prices are hit.

"With more families renting privately, and renting for longer too, these rent surges are a bigger problem for Britain, and require bolder solutions from policy makers. Short-term solutions include regular uprating of Local Housing Allowance to support poorer families, and the ultimate longer-term solution is to simply build more homes."

Key findings
According to the ONS’ latest data on private rents, average rents have risen by 15 per cent since January 2022, and are currently rising at their fastest rates on record, growing by 9 per cent over the year to February 2024. Meanwhile, various market estimates for rents for new properties report price rises of closer to a fifth since January 2022.

Private renting was historically seen as a tenure for the young, but nearly 30 per cent of below-average-income families headed by someone aged 30-49 were renters in 2021-22, up from just 11 per cent in the mid-1990s.

Earnings are a key driver of rental prices with the ratio of rents to earnings broadly stable around a slowly-falling trend between 2000 to the eve of the pandemic. At the beginning of 2020, the ratio sat just 0.1 percentage points below its long-run trend.

But the pandemic significantly disrupted the relationship between rents and earnings. The rent-to-earnings ratio has averaged around 1.5 percentage points below its long-run trend since the pandemic, and, at the start of 2022, rents were sitting around 5 per cent (or £50 per month) lower than we would have expected were the relationship between rents and earnings to have kept up with longer-term trends.

Core urban areas of the UK saw 4.9 per cent growth in rental prices between January 2020 and the beginning of 2022, lower than the 5.9 per cent average growth seen in other local authorities.
However, since the pandemic, urban areas saw a significant ‘bounce-back’, with core urban areas seeing average rental-price growth of 13.4 per cent between January 2022 and January 2024, 1.6 percentage points higher than the growth seen in other local authorities over this period.

Following the pandemic, high inflation has prompted rapid nominal-earnings growth, with pay up by 13 per cents since the beginning of 2022.

Looking ahead, with earnings growth now slowing, rental price growth for new tenancies looks like it is easing, falling from its recent peak of annual growth of 10.4 per cent over the year to June 2023 to 7.5 per cent over the year to March 2024.

Even if rental-price growth for new tenancies cools, however, this does not mean pressures on renters as a whole will subside. This is because the average rent paid by the whole population of renters will likely continue to rise. The total ‘stock’ of rents has grown much more slowly than both rents for new tenancies and earnings over the 2020s, rising by less than a fifth since January 2020, compared to 23 per cent growth in earnings, and the 32 per cent growth in rents for new tenancies.

If we assume the ratio of rents to earnings in the UK will return to its pre-pandemic level in three years’ time, then the total ‘stock’ of rents would need to rise by 13 per cent (or 4.2 per cent a year on average), well in excess of the forecast 7.5 per cent growth in average earnings.

Read the full report HERE
Pdf 29 Pages.