Rents rise – but slower although additional upward pressure is coming

HomeLet has revealed that 2016 rents in the UK rose on average 1.7% in December – less than half the 3.8% rate of rental price inflation in December 2015.

According to the report, landlords agreeing new tenancies during December achieved more modest increases in rent than in previous months, with the annual rate of rental inflation falling from 2.9% in November.

Across the UK as a whole, the average rent for a new tenancy commencing in December was £892 per month, compared to £877 in December 2015. In Greater London, rents rose from £1,478 to £1,508 over the same period, a smaller percentage increase but still a higher rental value.

HomeLet’s Rental Index data for 2016 reveals a year of two halves: during the first six months of the year, annual rental price inflation was consistently 4% or higher, peaking at 4.7% in June. In contrast, the second half of the year saw rental price growth steadily reducing to the lowest rate of increase in the final month of year.

In some areas of the country the slowdown over the year was even more marked. Rents in Greater London were 2% higher in December compared with 6.8% at the mid-year point.

Rental price inflation is still running ahead of general inflation as measured by the consumer price index, but the slowdown seen during the second half of 2016 raises questions as to the extent to which landlords will be able to raise rents further during 2017. While some property analysts have predicted strong rental price appreciation in the years ahead, particularly relative to house price growth, landlords, in recent months, looked for much more modest increases. This could prove significant during 2017, with impending tax changes beginning in April potentially reducing the returns available from buy-to-let property investment.

While it has been suggested landlords impacted by the reduction in mortgage interest tax relief will seek to recoup this additional cost from tenants, this may not be feasible if lower rental price inflation persists. Further cost pressures to come include the potential impact of November’s announcement of a ban on letting agents’ fees, which could see landlords asked to meet such expenses in connection with renting their property to new tenants.

Across the UK as a whole, rent accounted for an average of 28.0% of tenants’ household income before tax, down slightly on last December’s figure of 28.4%. In London, the equivalent figures are 31.0% and 31.2%.

Martin Totty, HomeLet’s Chief Executive Officer, said: “While demand for rental property remains strong, landlords always have to be mindful of tenants’ ability to pay higher prices. The data recorded by the HomeLet Rental Index during the second half of last year suggests we have now begun to approach an affordability ceiling, particularly in areas of the country where rental price inflation was previously highest.

While the industry has speculated that landlords will increase rents to mitigate the impact of factors such as the impending reductions in mortgage interest tax relief, this may prove problematic given the pricing trends we’re currently seeing in the market and the potential for higher inflation and a squeeze on real earnings in 2017.

The private rented sector is now having to cope with a series of disruptive elements, just at a time of great economic uncertainty, and amid a continuing systematic imbalance between supply and demand for residential property. The assumption that landlords have sufficient means to bear higher costs will soon be tested. Tenants must hope they do.”

The regional picture for 2016

Northern Ireland, where rents were 6.4% higher in December than in the same month of 2015, saw the strongest rental price inflation of any region in the UK last year, followed by the North-East of England (4.9%) and Wales (3.9%). Just one region saw a fall in rents over the same period, with the East Midlands recording a drop of 0.4%.

Regions that were more likely to show higher rental increases during the first half of the year saw a more marked pull-back in the second six months. This was led by London, but the South-East saw rental price inflation fall from 4% in June to just 1.7% in December, while the East of England dropped from 5.5% to 2.5%.