As the mortgage crisis continues to affect millions across the UK, renters are also feeling the squeeze. The issue, characterised by soaring prices and a scarcity of affordable housing, has far-reaching consequences for the economy.
New research from Zoopla shows the average tenant in the UK now pays 28.3 per cent of their pre-tax income toward rent. Affordability is at its worst for a decade in seven of the 12 regions and countries in the UK. In London, the outlook is much more grim with renters spending 40 per cent of their gross earnings, albeit this is 3 percentage points fewer than the peak in September 2015.
Annual rental growth has been above 10 per cent for more than a year, with rents rising 10.4 per cent in the past 12 months. Rents have been increasing faster than average earnings for nearly two years.
So what's causing this rise? The Bank of England’s struggling plan to tackle inflation, including the shock decision to boost the bank rate by 0.5 percentage points to 5 per cent last month, has increased the cost of borrowing for landlords, who are passing on costs to tenants. At the same time landlords are exiting the market, which is reducing the supply of rental homes, because tax changes have hit profits, or they are converting them to short-term lets.
Now, there are just too many tenants hunting for a short supply of homes. According to Zoopla there are between 20 and 40 per cent fewer homes to rent than before the pandemic in most regions. In addition, those on housing benefits can only afford 5 per cent of privately rented properties, according to the Institute of Fiscal Studies. Paul Dales, economist at Capital Economics, said: “Our property team believes the supply/demand imbalance will continue and prevent rents inflation from falling back much.”
Furthermore, the mortgage cost crisis has forced aspiring homeowners to push back plans to get on the ladder, meaning there’s no letting up on pent-up demand.
What's happening to landlords?
Zoopla’s research found that higher mortgage rates had hit landlords with loan-to-value mortgages of between 50 and 75 per cent hard, with nearly a third of landlords in this position. This could further constrain the number of rental homes available as landlords have no option but to sell. More than half of all landlord sales are in London and the South East, the two most expensive property regions in the UK and where rents are rising the fastest.
What is the government doing?
In recent months, Michael Gove, secretary of state for housing, has pushed major reforms that protect renters and leaseholders before the next election, including banning ‘Section 21 orders’ that allow landlords to evict tenants in England with eight weeks' notice and no explanation. This has forced landlords to re-think their buy-to-let plans with many walking away from the market.
The Conservatives have come under fire from Labour, who have said there aren’t enough policies that actually address the persistent housing shortage in the UK, and the opposition has promised to unleash building on the greenbelt if it wins the next election.
So are we in a rental crisis? Well the data suggests so. But it cannot be reduced just to a rental crisis, as this is a full-blown housing crisis. The widening gap between supply and demand of houses, rising costs and wages falling behind housing costs and inflation will have detrimental effects on the economy, as more of our money goes on covering up the lack of investment in housing.
