Collapse of rental stock and rent going up
November 11, 2022
For some time now many experts in the industry have warned that a rental property crisis is on the horizon. The fundamental driver is that the total volume of rental stock is diminishing due to landlords exiting the market.
There are many reasons driving this and to put the scale of the problem into perspective, Hometracks' UK Rental Market Q3 Report highlighted stock of homes to rent vs the 5-year average is a massive 45% down.
The problem, which is about to become cataclysmic in scale, is that the recent market turmoil, and primarily rising mortgage interest rates, has exasperated lettings demand and with rates expected to continue upwards this is going to grow exponentially at a faster pace. It means that with a huge shortage of stock and ever-increasing growth in demand, rents are going to spiral upward fast.
The Scottish government has already put in place measures to protect renters with rent caps, however, this is not going to solve the lack of stock nor the exit of landlords from the market. If anything, the Scottish approach is likely to fuel a bigger exodus and it is clear this will be a political own goal regardless of how popular, it is simply not sustainable.
The challenges to this market are laid bare in research provided by TwentyCi, an analytics company, which shows that Q3 2022 numbers compared with Q3 2019 (Covid data in 2020 and 2021 is simply non-comparable) for new lettings instructions and lettings agreed are down by 25% and 19% respectively. At the same time, the average asking price across the UK was £1,605 per month in Q3 2022, 19% higher than in Q3 2019. This is already going up at a faster pace!
Rising energy costs will also impact the type of property in demand. During and post-Covid space was a big factor, however, now less space, which equals less energy cost, is back in favour.
With the huge mismatch in the growing lettings demand versus the lack of rental stock, it is very likely that the government will have to re-think its approach to the landlord space and consider, even though potentially unpopular to some, a set of policies to incentivise landlords to invest and grow property portfolios. If they don't, the lack of rental stock and increasing rents will drive only the alternative which is to invest significantly more into social housing as people will need homes and if there aren't enough rental properties available rents are going to soar.
For many existing landlords now might be the time to grow their portfolios and take advantage of rental growth, however, for others the rising interest rates will mean it is time to sell.