- Annual rental growth to slow to 2 per cent by 2028
- UK renters spend a third of their income on rent
The record-breaking pace of residential rental price growth will dramatically slow from 2025 as prices reach an “affordability ceiling”, forcing more debt-laden buy-to-let (BTL) landlords to sell up, a leading estate agency has predicted.
According to Savills (SVS), rents will have surged 9.5 per cent over 2023, and increase a further 6 per cent in 2024 before growth slows to 3.5 per cent in 2025, and continues to subside in the three subsequent years. Savills said rampant wage inflation, a lack of supply, and landlords passing on the cost of high interest rates are the key drivers behind current increases, but added that growth could not continue at this “highly unusual” level.
Data from the HomeLet rental index reveals that British renters spend a third of their income on rent, the highest rent-to-income ratio on record, and the situation in London is even worse. Head of residential research at Savills, Lucian Cook, said this unprecedented rent-to-income ratio is why the market is so close to its affordability ceiling. But he said there will be a “lag” before a breach in this ceiling feeds through to real rents.
Cook noted this is because hot rental markets can take a while to adjust, and the supply-demand imbalance means some will still be willing to pay. However, he added that rents will eventually rise to a level where mortgages will begin to look like a more affordable option “particularly from 2025 onwards when you would expect the first interest rate cuts to start feeding through [to mortgage rates]”. The market moves of recent weeks imply an even earlier start date for this process.
Parents who previously might not have been willing to help their children with deposits will begin to change their minds as rent eats up more of salary and house-buying costs fall, Cook added. Meanwhile, the unaffordability means some renters would settle for less desirable locations or smaller accommodation.
“The level of rental growth we’ve seen is highly unusual,” he said. “Normally, what you’re talking about is rental growth somewhere between 0 and 3 per cent, broadly in line with earnings growth. What we’ve had here is some high earnings growth but some rental growth well above and beyond even that because of this particular supply and demand dynamic.”
Time to sell?
Cook said the forecast drop in rental growth from 2025 onwards would split the BTL market down the middle. For debt-laden BTL landlords, he believed many would sell up as the inability to increase rents makes it harder for them to pay the increasing mortgage on their BTL properties. Some BTL landlords are already struggling in this regard, with specialist property lender Octane Capital recording a doubling in BTL mortgage arrears from Q3 2022 to Q3 2023. Zoopla figures show around 40 per cent.
For landlords who pay for properties with cash or have paid off mortgages, the slowdown in rents won’t be as significant. What’s more, they and the large build-to-rent (BTR) institutions will be able to buy back into the market using cheaper debt as interest rates fall. Cook believes this is what BTR landlords such as Grainger (GRI) are likely to do in the coming years.
“The ability for more leveraged buy-to-let landlords to benefit from this rental growth is going to be limited because of the financial pressure they’re under,” he said. “Interest rates have gone up and they don’t get tax relief on that money.”
“However, the cash-rich investor is in a different situation [...] They will be happier around expanding their portfolio with modest debt and they’re going to be less worried about things like the Renters Reform Bill because they can diversify individual tenant risk across a number of properties.”
Zoopla figures show around 40 per cent of landlords have no borrowing at all, while another 30 per cent have mortgages with a loan-to-value ratio of less than 50 per cent. Further, wages climbed 8 per cent in the year to July, as per Bank of England figures.
Savills' rental forecast varies by region, presenting different returns for BTL landlords over the coming years. From 2024 to 2028, it predicts that rents in the south-west and the south-east will rise by a cumulative 20.4 per cent, whereas the increase for Yorkshire & The Humber and the north-east will be 15.3 per cent, a reflection of higher wages and lower rental supply in the two southern regions versus the north.
Meanwhile, in London, where demand and wage growth are both high, Savills said an increase in stock means the rental increases will not be as acute as in the rest of the south. It forecasts 18.2 per cent rental growth from 2024 to 2028.
