UK rents increased by 3.8% in the year to October 2022

A new index tracking the prices paid for renting property from private landlords in the UK, calculated by the Office of National Statistics (ONS), has just been released.

The main points identified are:

“Private rental prices paid by tenants in the UK rose by 3.8% in the 12 months to October 2022, up from 3.7% in the 12 months to September 2022.

Annual private rental prices increased by 3.7% in England, 3.2% in Wales and 4.2% in Scotland in the 12 months to October 2022.

The East Midlands saw the highest annual percentage change in private rental prices (4.8%), while London saw the lowest (3.0%).”

With landlords leaving the sector and demand for renting still very high, it’s surprising that the average rise has been so small. At an increase of 3.8% in 10 months, more was expected, that’s according to mortgage broker Nick Morrey at Coreco, speaking to Mortgage Introducer.

To qualify this view, Morrey said that because many tenancy agreements are yet to come to the end of their 12 months’ or two years’ terms, he is expecting significant increases later. This is because of the pressure on landlords facing considerably increased costs and mortgage payments that could have doubled or even trebled by next year.

Pressure on interest rates

Morrey thinks mortgage rates will continue to increase through 2023 and into 2024, “as the base rate is expected to top out around 4%,” which will mean that most buy-to-let mortgages will be above that figure, though perhaps slightly lower than they are right now.

The financial shockwaves following Liz Truss and Kwasi Kwarteng’s “mini budget” sent rates shooting up, so any decline in rates from current levels will come as something of a relief, but this has only been brought about by the calming effect on the money markets by Jeremy Hunt’s Autumn Statement.

Others think there is every expectation that the Bank of England will continue to raise the base rate until it’s above 5 per cent. That’s important because the bank rate influences many other interest rates in the economy. That includes the lending and savings rates offered by high street banks and building societies, and of course mortgage lending rates. The bank rate is currently 3%.

A long recession is looming

The higher the interest rates around the world (largely set by the US FED) the more the Government will have to spend on servicing its £100bn or so of national debt. Its one of the largest elements of public spending not under the direct control of government, but determined by the size of government debt, mostly the legacy of past budget deficits and Covid borrowing.

With GDP growth stagnating, and the prospect of higher interest payments on the Government’s credit card, it’s no wonder the BoE is forecasting one of the longest recessions in prospect on record.

Austerity 2

The country is not in a good place. The latest available Office for National Statistics figures show that the Government’s interest payments were £8.2bn in August, £1.5bn more than a year earlier and the highest August figure since monthly records began in 1997. If anything things have got worse since then.

Many government bonds are linked to the Retail Prices Index measure, which was 12.3% in August, and which resulted in a public sector borrowing amount of £11.82bn, far more than the £8.5bn forecast by economists. And all this before factoring the drastic reckoning of the financial shockwaves following Liz Truss and Kwasi Kwarteng’s “mini budget”.

Landlords’ reaction

The result will be that landlords with mortgages will do everything possible to minimise their losses: reducing costs wherever possible and that means less spending on maintenance and improvements, and increasing their revenues (rents) as much as they are able.

Tenants under pressure as well

However, tenants will be under large constraints also. With big increases in energy and food prices, wage increases trailing inflation by a good measure, and increasing job insecurity with the onset of a recession, there are limits to the rent increases tenants can afford.

Having emerged from the two-year blight of a Covid pandemic, restrictions on rent increases and evictions, landlords could be forgiven for expecting some respite now, but unfortunately that’s not to be. The Russian invasion of Ukraine saw to that and tenant’s can’t always help them out.

Lower standards of living for all

The upshot is, we are all going to take a hit, whatever walk of life we’re in. Inflation is running at 11.1 per cent right now, taking a chunk out of cash savings and an immediate increase in the cost of living. Secondly, the fall in the value of the pound increases the cost of imports, putting up the cost of all the goods the UK imports. And as we are largely an importing nation for consumer goods, these cost increases will be considerable.

It means that real household disposable incomes per head (and these affect both landlords and tenants) are predicted to fall by 4.3 per cent in 2022-23 and by another 2.8 per cent in 2023-24. This two-year drop of 7.1 per cent will take our real incomes back to where the country was 8 years ago – 2013-14 – we will have lost almost a decade of income growth!

Without a commensurate increase in productivity growth over the next few years, and the recent tax rises detract from this, we will not see the prosperity we’ve become used to for some considerable time.

A gloomy background

It’s against this gloomy background that we see some landlords leaving the private rented sector. Many have reached an age where they have had enough and want to retire, while others who came into the sector as amateur or accidental landlords, not serious about expanding or becoming more professional. The latter’s something that’s going to be absolutely necessary in future to navigate an increasingly regulated PRS regime.

Headwinds galore

There are also other headwinds on the way: the removal of the Section 21 eviction process scheduled for next year scares some landlords about getting stuck with unruly tenants, while the looming upgrades needed for the latest energy efficiency standards, likely to be EPC rating “C” in the not too distant future, will mean considerable investment and upheaval for some landlords – this could be in the region of £10 to £15 thousand pounds on some older properties.

As landlord leave, and goodness knows, has the Government taken this into account?, even more pressure will be put on rents. Any reduction in the rental housing stock, when first-time buyers can’t afford to buy, will push them up even more.

Morrey believes all these EPC costs could be the ‘final straw’ for some landlords who will decide to sell up, and especially before the ending of section 21 when they can get back possession for a sale with vacant possession.

“If the [EPC] requirements do not make it into law, then this may give a reprieve to some landlords whose properties are not in an energy efficient state, but it would leave many feeling the UK is not doing what it should in yet another area for global warming, especially with energy prices at their current levels,” he concluded.

“In the past many landlords were making enough profit on their property as interest rates were so low, they could afford to allow good tenants some grace when faced with difficult times, but now those landlords are likely to be unable to assist themselves with things like payment holidays or restructured payment schemes,” he said.

Rent arrears and even repossessions are issues that could become a feature of 2023 and with tenants who cannot meet the monthly rent, their landlords are likely to be seek out new tenants who are able to pay regularly.

“The government is in a very cash strapped situation – therefore not really in a position to fund any kind of rent payment holiday scheme beyond Housing Benefits, and you have to be unemployed in order to claim in most circumstances not ‘just a little short for a while’,” says Morrey.

House prices in the recession

Studies of house prices crashes by economics consultancy Oxford Economics show that employment is the key and decisive factor in determining the how severe a downturn will be – a because a spike in joblessness will raise the number of forced sellers.

“History shows that if labour markets can remain strong, then the chances of a more benign correction are higher,” says Innes McFee, chief global economist at Oxford Economics.

Employment levels in many advanced economies have recovered since falling at the start of the pandemic. But there are now early signs that labour markets are starting to cool as weak economic growth hits demand for workers, and some companies, especially those in the tech sector, are starting to see substantial lay-offs.

The UK Office for Budget Responsibility expects unemployment to rise by 505,000 to a peak of 1.7 million — an unemployment rate of 4.9% -— in the third quarter of 2024.

“A decisive increase in unemployment is a very big danger for housing markets,” says Adam Slater of Oxford Economics.

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