Historically, rents have moved in line with household earnings. After all, landlords can only charge what tenants are able to pay.

So, with weak earnings growth since the end of 2016, the sluggish rental growth of the last two years should come as no surprise. Earnings fell in real terms in 2017 and 2018, as inflation ran above the Bank of England’s target of 2%.

In the past, rental growth in London has been able to outperform earnings, as renters formed larger households with friends to split their rental bill. This trend seems to have reached its limit. London rents are now seeing a slowdown, with rents falling by 0.3% in the year to August 2018. With rental affordability in London stretched, weaker growth is likely in the short term.

However, tightening access to mortgage finance, changing lifestyles and demographics is driving demand for privately rented homes at all price points. That mismatch in supply and demand has attracted a new kind of investor to the market.

Boom time for BTR?

Changes to tax relief on buy to let mortgage interest payments have made many private investors take a second look at their portfolios. With less tax relief and rising interest rates, many have chosen to consolidate or leave the sector. Depending on how policy evolves on longer-term tenancies and rent regulations, the pace of flight may accelerate further.

While putting pressure on buy to let, the Government has shown growing support for the institutional build to rent sector (BTR). Purpose-built rental blocks that are managed by professional landlords could help raise standards across the rental market and increase the supply of rented properties in areas of high demand.

BTR is already gaining momentum, making up 8.7% of new housing starts in 2016/17. However, while BTR is gathering pace, it isn’t yet delivering enough homes to counter the flight of buy to let investors. From Q1 2017 to Q2 2018, there were just under 10,000 build to rent completions. In the same period, 72,000 buy to let landlords redeemed their mortgages.

Until the supply of BTR properties increases dramatically, we will remain reliant on cash investors to bring more stock into the rental market. As a result, we’re likely to see demand grow faster than supply over the next five years, driving rental value growth.

YIELDS: REGIONAL TRENDS REVERSE

Yields, annual gross rent as a proportion of the house price, have historically been lowest in London and the South. Since 2013, yields have decreased across the country, but have fallen fastest in London, where the mismatch between rental and house price growth was greatest. By contrast, yields in the Midlands and the North have fallen much less.

Our forecasts show these yields converging. We predict that as rents grow faster than house prices in the affordability-constrained South, yields will rise. In the Midlands and North, where house price growth will outpace rental values, we expect to see yields sharpen and move closer to those in the South.