The rising cost of renting

The rising cost of renting

The post-pandemic housing market has been tough for mortgage holders, and, on some measures, even harder for those renting in the private sector.

• Stories abound of soaring rental costs, tenants engaging in bidding wars, paying as much as six months’ rent up front and being asked to submit CVs for consideration by landlords. Propertymark, an industry body, recently reported that every property its members put on the market generates an average of 13 prospective tenants.

• Yet strangely, none of this fits with the official data which show that, relative to wages and general inflation, rents have been falling. 

• The Office for National Statistics report that in the last year private rental costs have risen by 5.1%, compared to a 6.9% increase in average earnings and 7.9% inflation. Stories of rising rents have multiplied since the pandemic, but since January 2020 earnings have grown by about 20%, almost twice the growth in private rental costs. On these measures, renting has become more affordable.

• Unfortunately, these averages miss an important part of what’s happening. The rental squeeze is, indeed, all too real.

• The 5.1% increase in rents recorded by the ONS measures the average rent paid by all private renters and relates to the stock of all rental property. When we look at a flow measure of costs, so the cost of a new rental, prices have risen far faster. The estate agent Rightmove reports that average asking rents are rising far faster than earnings - by 9.3% in the last year and by 33% since the pandemic. The increases in London have been even greater.

• So the big squeeze is happening for those moving into new rental accommodation, especially those in larger, more popular cities. A similar story of rising rental costs is playing out in the US, Canada, New Zealand and Ireland, with soaring demand hitting constrained supply. 

• In the UK, costs and regulations have mounted, making buy-to-let a less attractive proposition for landlords.

• The 2016 Budget raised stamp duty on buy-to-let properties by three percentage points and between 2017 and 2021 the maximum rate of tax relief on mortgage interest payments for rental properties was cut from 45% to 20%. Since 2020 landlords have not been able to let the least energy efficienct properties unless they can show that improvements are not possible or cost over £3,500. These requirements will be tightened over the next five years. The government is also planning to introduce new legislation, the Renters (Reform) Bill, that would end no-fault evictions, ban above-market rent rises and move to rolling rather than fixed-term tenancies.

• Yet the largest single factor driving up landlords’ costs has been rising interest rates. The average interest rate on a two-year fixed rate buy to let mortgage has risen from 1.8% on the eve of the pandemic to 6.2% last month. Many landlords have seen their financing costs double or even triple at a time when other investments – notably government bonds - offer attractive yields. Weakening house prices add further risk to the buy-to-let equation. 

• Buy-to-let has become a less attractive investment, but there has been no mass exodus of landlords.  Rather the rapid growth in the stock of buy-to-let property which was seen since 2000 is over. The latest figures, for 2022, show that 19.4% of UK households rent privately, down from a peak of 20%.

• This reduction in rental supply has coincided with soaring demand. Rapid earnings growth, up by about 20% since early 2020, have helped bid up rents. And the number of would-be renters has been boosted by high levels of migration. In 2022 net migration – the difference between those coming to the UK and leaving – reached a record 606,0000. (A surge in the number of foreign students returning to the UK after lockdowns boosted migration, as did the war in Ukraine, repression in Hong Kong and the introduction of a ‘points based’ visa regime which has raised migration numbers from outside the EU).

• Non-UK nationals account for a high proportion, around 26%, of the UK private rental market, far higher than their share of social housing (8%) or owner-occupied housing (4%). Thus the scale of net migration last year, at over 600,000 people, in a private rental market (in England and Wales) of about 5 million households, is likely to have materially added to rental demand. Analysis by Capital Economics, a consultancy, estimates that net migration could have raised rental levels by up to 8.0% (Levels of net migration into Canada and the US have also been elevated and seem likely to have contributed to rental inflation in these countries). 

• The big picture then is of a fixed or declining stock of rental property facing a surge in demand. The result, inevitably, is higher rents and, for some, less space (the average private renters in London has about 20% less space than in 1996).

• Yet this doesn’t capture the full picture. People who rent tend to be a more precarious position than owner occupiers. Those living in private rental accommodation typically spend 33% of their income on rent while those with a mortgage typically spend just 10% on mortgage repayments. The Resolution Foundation estimates that 6 in 10 working age adults who rent are struggling to meet their housing costs. Those who already spent a high proportion of their income on housing are struggling the most. The 25% of private renters who are on housing benefits, the rates of which have been frozen since March 2020, face particular problems.

• The post-pandemic factors which have raised rental costs – such as higher interest rates and record migration – will fade. The underlying problem, of rising demand for housing and a constrained supply, will not. 

For the latest charts and data on health and economics, visit our Economics Monitor:
https://www2.deloitte.com/uk/en/pages/finance/articles/covid-19-economics-monitor.html

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 0.5% at 7,524.

Economics

• The UK economy grew by a greater-than-expected 0.2% from the first quarter to the second quarter with output rising 0.5% between May and June
• Business investment surged in the second quarter while UK manufacturing output bounced in June. Together, these figures make a UK recession this year look less likely
• US headline inflation picked up 3.2% in the 12 months to July, up from 3.0% the previous month, largely due to base effects from the comparison period last year. With core inflation falling from 4.8% to 4.7%, this data supports the case that the US Fed will keep interest rates on hold at its next meeting
• Chinese headline inflation dropped into negative territory as consumer prices fell by 0.3% in the year to July while Chinese exports and imports saw greater-than-expected falls of 14.5% and 12.4% in the same period, pointing to weakness in the world’s second largest economy
• Chinese economists are being placed under pressure by the Chinese government to downplay negative economic news such as deflation, the FT reports
• The International Energy Agency reported that global oil demand hit a record high of 103m barrels per day amidst higher demand in advanced economies and China, and the recovery in air travel
• Global natural gas prices soared following reports that staff at LNG facilities in Australia, a significant global supplier, were planning strike action
• The Brent crude oil benchmark closed at $87/barrel last week, up from $75/barrel at the start of July as concerns have grown over oil supply through the Black Sea

Business

• Western allies of Ukraine are moderating their expectations for the Ukrainian counter-offensive against heavily entrenched Russian troops, CNN reports. Weather conditions are expected to deteriorate in the autumn, slowing Ukrainian advances
• Saudi Arabia is seeking to join the UK, Japan and Italy’s next generation fighter aircraft project, the FT reports
• Nearly a third of UK flights were cancelled or delayed in the first five months of this year as the industry continues to deal with lingering pandemic disruptions, airspace closures, strikes and bad weather
• The recovery in business travel by air has stalled at around 60% to 70% of pre-pandemic levels in Europe and 75% in the US according to airline figures
• UK homewares retailer Wilko appointed an administrator after failing to find a buyer, highlighting the difficult conditions on UK high streets
• UK junior doctors took four days of strike action in a dispute over pay while separately data showed that NHS waiting lists hit a fresh record of 7.57m in June
• US online retailer Amazon is reportedly monitoring staff attendance in the office using badge swipes and writing to staff who are in fewer than three days a week
• Teleconferencing provider Zoom announced it would require staff to attend the office for at least two days a week
• The four largest retail banks in the UK have seen deposit outflows of nearly £80bn in the year to June 2023, in part due to savers seeking higher interest rates at smaller competitors, the FT reports
• US banks’ loan losses hit their highest level in over three years in the second quarter driven by losses on credit card lending and commercial property
• The Italian government watered down plans for a windfall tax on banks following a sharp fall in their share prices

Global and political developments

• The UK Electoral Commission apologised after “hostile actors” accessed internal emails and voter records
• Ecuadorian presidential candidate Fernando Villavicencio was assassinated at a campaign rally. Mr Villavicencio had campaigned against corruption and his murder come amid rising violence stemming from the drugs trade in the South American country
• The US attorney-general appointed a special counsel to investigate US president Joe Biden’s son Hunter Biden, complicating a case that is being closely followed by the president’s opponents
• The US government announced a ban on US investment into the Chinese quantum computing, artificial intelligence and advanced microchip sectors. The UK is reportedly considering similar measures
• The Police Service of Northern Ireland accidentally published the details and locations of its 10,000 officers and staff, potentially exposing them to attacks by dissident republicans
• A boat carrying migrants across the English channel sunk, killing six people
• Wildfires in the US state of Hawaii killed at least 80 people
• Iran released five American prisoners to house arrest as part of a deal that would see Iranian funds unfrozen and Iranian prisoners freed in the US, Reuters reports

And finally… authorities in Argentina have announced a crackdown on foreign football fans who rip up Argentinian bank notes to rile up local fans. Inflation in Argentina is currently running at 116% following years of economic difficulty – fears for tears