Rents rise across the UK due to rising mortgage costs| Interest rates
It’s a tale of two markets: while private rents have soared to record highs in the UK, making life precarious for tenants, the for-sale sector has slowed sharply and property values have started to fall, with sharper declines predicted for next year.
The latest house price index from Nationwide, Britain’s biggest building society, along with Bank of England mortgage lending data due this week, should shed further light on the severity of the UK’s housing slowdown.
The market was cooling, and mortgage rates were creeping up, even before the Truss government’s disastrous mini-budget brought the pandemic-era housing boom to an abrupt halt.
Mortgage rates rose to well above 6 percent, a level that was last seen in 2008, adding hundreds to mortgage payments and triggering a slump in demand. Unsurprisingly, Nationwide figures for October showed the first monthly drop in house prices in 15 months: at 0.9%, it’s the largest fall since June 2020.
Expensive mortgages have deterred many first-time buyers, who are now renting instead in the hope that rates will fall in the new year – causing intensified competition in the rental market, according to property site Rightmove.
But that’s not the only explanation for the surge in rental costs. Andrew Wishart, Capital Economics, states that renters who work from home would rather live alone than in a small, cramped apartment. While the number renting a single property rose by 530,000 in 2020-21 compared to the 2 million who rented in a family of three or more, it fell by 2 millions.
Wishart suggests that rising living costs could reverse the trend. “But with the average tenancy lasting four years, it won’t happen overnight,” he says, adding that buy-to-let landlords face a severe financial squeeze over the next few years and many could sell up, further reducing supply.
Unsurprisingly, this shortage of rental properties has led to tenants being more willing to pay more. Foxtons, a London estate agent, reported a 22% increase in rents in the capital over the first nine months in 2022. The average rent hit a new high of £571 a week – about £100 higher than at the beginning of the year.
Record numbers of new tenants registered in the third quarter. There were 30 listings for each property, an increase of around three times the recent level. The supply of tenants has also declined: London landlords received 18% fewer new requests in the first nine month than a year ago.
Foxtons describes the conditions in London’s rental market as “extraordinary”, adding that “the impact of the post-Covid return to the city has been acute”.
The rise in international student renters and corporate let tenants has exacerbated supply problems. 11% of landlords have decided to sell their property after a tenancy ends this year.
Rightmove published research last month that showed that advertised rents have increased even more in other cities and towns. These include Newbury (Manchester), Cardiff and Cardiff which all saw annual increases of around 20% or more. Many experts predict that house prices will decline between 5% – 12% next year as rents rise.
Capital Economics forecasts that 2023 will see housing transactions fall to their lowest levels in ten years and that the average price of a house will decline by 12%. Rightmove estimates a smaller drop of up to 5.5% while JLL predicts a decrease of 6%.
Interest rates remain on an upward trajectory, with the Bank of England predicting to increase them by half point to 3.5% in Mid-December. The rate of interest is expected to reach 4.25% by spring next year, which is lower that was once feared.
“Even though mortgage rates are likely to drop back to 4% by 2024, we suspect that house prices will have to fall by 12% before affordability improves enough for demand to recover and the fall in prices to bottom out,” says Wishart.