Housing

Through the roof

Recent trends in rental-price growth

Cara Pacitti
Cara Pacitti

With many more families in the UK now renting, and renting for longer, the rising cost of doing so poses a significant challenge to living standards. This briefing note looks at what has been driving the rapid increases in rents over the past two years, and what that means for the future.

We find that earnings growth and a post-pandemic re-adjustment are key drivers of the rental price growth we’ve seen in recent years, with popular theories about the rise, including an ‘exodus’ of landlords from the private-rental sector, not supported by the evidence. While rental-price growth for new tenancies is set to continue to ease in the coming months, many renters will still see their housing costs rise over the coming years, as the high market rates we’ve seen filter through the private-rental sector. Against this backdrop, it’s crucial that the Government continues to support low-income renters by ensuring the Local Housing Allowance keeps pace with rents over the coming years.

Key findings

  • According to the ONS’ latest data on private rents, average rents have risen by 15 per cent since January 2022, and are currently rising at their fastest rates on record, growing by 9 per cent over the year to February 2024. Meanwhile, various market estimates for rents for new properties report price rises of closer to a fifth since January 2022.
  • Private renting was historically seen as a tenure for the young, but nearly 30 per cent of below-average-income families headed by someone aged 30-49 were renters in 2021-22, up from just 11 per cent in the mid-1990s.
  • Earnings are a key driver of rental prices with the ratio of rents to earnings broadly stable around a slowly-falling trend between 2000 to the eve of the pandemic. At the beginning of 2020, the ratio sat just 0.1 percentage points below its long-run trend.
  • But the pandemic significantly disrupted the relationship between rents and earnings. The rent-to-earnings ratio has averaged around 1.5 percentage points below its long-run trend since the pandemic, and, at the start of 2022, rents were sitting around 5 per cent (or £50 per month) lower than we would have expected were the relationship between rents and earnings to have kept up with longer-term trends.
  • Core urban areas of the UK saw 4.9 per cent growth in rental prices between January 2020 and the beginning of 2022, lower than the 5.9 per cent average growth seen in other local authorities. However, since the pandemic, urban areas saw a significant ‘bounce-back’, with core urban areas seeing average rental-price growth of 13.4 per cent between January 2022 and January 2024, 1.6 percentage points higher than the growth seen in other local authorities over this period.
  • Following the pandemic, high inflation has prompted rapid nominal-earnings growth, with pay up by 13 per cents since the beginning of 2022.
  • Looking ahead, with earnings growth now slowing, rental price growth for new tenancies looks like it is easing, falling from its recent peak of annual growth of 10.4 per cent over the year to June 2023 to 7.5 per cent over the year to March 2024.
  • Even if rental-price growth for new tenancies cools, however, this does not mean pressures on renters as a whole will subside. This is because the average rent paid by the whole population of renters will likely continue to rise. The total ‘stock’ of rents has grown much more slowly than both rents for new tenancies and earnings over the 2020s, rising by less than a fifth since January 2020, compared to 23 per cent growth in earnings, and the 32 per cent growth in rents for new tenancies.
  • If we assume the ratio of rents to earnings in the UK will return to its pre-pandemic level in three years’ time, then the total ‘stock’ of rents would need to rise by 13 per cent (or 4.2 per cent a year on average), well in excess of the forecast 7.5 per cent growth in average earnings.

Recommendations

  • In order to support low-income renters with their rising housing costs, the Government should commit to consistently uprate LHA in line with local rents, and to scrap the benefit cap that prevents renters in some high-cost areas from receiving full support.
  • Longer-term priorities must be to address the barriers to home ownership and the erosion of the social-housing sector that have expanded the private-rental sector over recent decades.

Further reading

Housing Outlook Q4 2024
·
Alex Clegg, Lindsay Judge
Building blocks
Assessing the role of planning reform in meeting the Government’s housing targets
·
Camron Aref-Adib, Jonathan Marshall, Cara Pacitti
Housing Outlook Q2 2024
·
Felicia Odamtten
Cara Pacitti
Cara Pacitti Senior Economist