Britain’s tenants are feeling much more pressure from soaring interest rates than the rest of the housing market.
Rents are set to rise 25% over the next four years as landlords pass on extra costs from pricier mortgages and tougher regulation, according to a report from broker Hamptons International. Meanwhile, house prices — which are declining at the fastest pace in 14 years — are set to drop 5% over the same period when adjusted for inflation, Hamptons said.
“There’s a strong argument that the Bank of England’s quest to quell inflation has hit the rental sector harder than any other part of the housing market,” said Aneisha Beveridge, head of research at Hamptons. “It’s hard to see any of these pressures receding any time soon, which is why we expect rents to continue rising over the next few years.”
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UK households are facing a stream of cost pressures triggered by inflation that’s slowly dropping back from generational highs. With the BOE raising rates 14 times to try and arrest the rise in prices, the knock-on effects for mortgage costs have led to a slump in first-time buyer sales, leaving prospective homeowners stuck in ever-pricier rental contracts.
The average rent on a newly-let property in Britain will rise 8% over the course of 2023, according to Hamptons, before climbing a further 17% by the end of 2026 as more landlords roll off fixed-term loans and move to costlier deals. There were 43% fewer homes available to let across Britain in July compared with the same month in 2019, giving landlords more power to haggle for higher rents with less risk of losing tenants.
London rents are likely to grow even faster in the next two years, largely due to more landlords in the city relying on increasingly costly financing. The capital is also the lowest-yielding region for landlords in the country, meaning more will turn to rent hikes to avoid slipping into mortgage arrears.
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Hamptons expects house prices to drop 7.4% by the end of this year when adjusted for inflation, before continuing to decline annually until 2025. This compares to a fall of 16.5% in 2008 when the global financial crisis was raging.
The broker predicts nominal values — which aren’t adjusted for inflation — will rise 5.5% by the end of 2026, though growth won’t resume until 2025.
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Some economists are forecasting heavier price drops, with Bloomberg Economics predicting a double-digit fall from last year’s peak. Still, Hamptons said it “cannot see much improvement in the supply of new housing” an issue that’s propping up prices even in tough market conditions.
“High inflation for other goods and services means that in real terms, the average price of a home will have fallen around 11% between 2022 and 2024,” Hamptons’ Beveridge said. “This will be more akin to the U-shaped downturn of the early 1990s than the V-shaped crash and subsequent speedy recovery in 2008.”