How much more can rents rise?

Homeowners have enjoyed years, perhaps even decades of low mortgage repayment costs and this has also kept down the cost of rents. Whilst most people in the private rented sector believe the recent interest rate rises, as well changes to tax and regulations will to put pressure on landlords. Millions of landlords around the UK are beginning to consider passing on costs to their tenants and it begs the question: “How much more can rents rise?”

Landlords have faced a whole range of changes over the last few years, including a reduction in tax relief, more regulation, increases in stamp duty for second properties. However, despite these pressures, there has been little in the way of increases in rental prices.

Whilst the quarter of a percent increase in rates isn’t going to make a huge difference to the lives of most landlords month on month, you may perceive it to be the symbolical representation of the way things are going in the private rented sector. This may trigger landlords to increase rents.

The Royal Institution of Chartered Surveyors predicts that private rents will go up by over 25% in the run-up to 2021. They originally predicted that property prices will go up by just under 20% during the same time period, however, this may well be revised upwards, due to the impact of the Chancellor reducing stamp duty for first-time buyers on houses under £175,000. 

Buy-to-let mortgage applications have dramatically declined over the last year and a half and it’s likely that 2015 will be the peak year for buy-to-lets.

Tenants rights campaign group Generation Rent has also become more prominent in recent years arguing that tenants should not be expected to pay more than a third of their income. They argue that rising rents are increasingly straining families throughout the country, many of whom haven’t seen increases in their own wages.

During the Autumn Budget, the Chancellor announced there would be a £8bn investment for private housebuilding and build-to-rent homes which should go to some way to demonstrate the importance of the emerging sector.

These build-to-rent homes are designed and built specifically for the rental market to be owned by developers and institutional developers - much in the same way cars are first sold into leasing fleets - rather than private landlords, who on the whole let out a property they’ve either previously lived in, have inherited or which they have bought as a buy-to-let.

Being specifically designed for tenants, build-to-rent properties are often more appealing to tenants. They are new builds and may provide an increased sense of security through longer-term tenancies and more professional property management.

Although this should introduce more properties onto the market - with many believing the sector will grow by around 180% by 2021 - it’s believed that due to the relatively high specification and being more tailored towards tenants, many of the build-to-let properties will command a higher rent which could in turn push rents up, as local landlords move to achieve rental parity.

Generation Rent said: “High rents prevent tenants from enjoying the quality of life they would have in other tenures. On top of this, speculation by landlords in the property market has made it harder for renters to escape high rents and also takes investment out of productive parts of the economy that might otherwise build homes or create jobs.

“While the government has reformed the tax system to discourage speculation, there remains an urgent need for investment in house building that would reduce private rents and ensure that more homes are affordable to people on low incomes.”

Although landlords may have to pass on some costs to tenants, they must recognise that tenants are already stretched and other household related costs, such as utility bills and where fuel poverty (which impacts one in five rental households), means it’s in a landlords interests to ensure rents remain reasonably priced.

Landlords should also appreciate that if rents rise too rapidly in response to regulation, it’s likely that the government will be forced to introduce further regulation to prevent rents rising further. Something it’s been less keen to do historically.

According to our partners HomeLet, in October 2017 the average rent in the UK was £909 whereas the average rent for the UK excluding London was £755. 

With the average household income after tax in the UK coming in at around £30,000 according to Department of Work and Pensions, it’s perceivable that rents could increase by another 9% before it would become a national issue. In this sense the average UK rent would be around £1,000 and the average rent in the UK excluding London would be around £820.

Of course, there are many factors that play into this. For example, if wages started to increase it’s possible this could provide an inflationary force on rents as well. Likewise, landlords must act responsibly and be prepared to react to market forces and reduce rents where appropriate.

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