The opening line of any rental forecast essentially writes itself these days: there are more people looking to rent in the UK than there are homes available. And the concern for renters is that the outlook for supply has worsened since our last forecast.

Dynamics: Demand continues to outweigh supply

Looking back on the past three years, the overarching driver of the rental market has been that there were more people looking to rent than properties available. While tenant demand has come down from its record highs of 2021 and 2022, it remains at elevated levels, according to the RICS survey. This is supported by analysis of portal listings data, with properties letting 20% faster in 2024 to date than during 2018/19.

At the same time, there has been little improvement on the supply side. The RICS survey has continually reported a lack of new supply coming to the market. This is borne out by the latest snapshot of listings on the market, with the number of available rental listings per active letting branch 16% below their 2018-19 level in September. 

High demand and low supply has been the influence behind the significant rental growth seen over the past few years. And at a national level, this pattern looks set to continue into 2025, with rents expected to rise above incomes again. But there are signs in some markets, especially London, that affordability constraints are starting to outweigh the supply and demand imbalance.

Caution: Speed limits ahead

In the 12 months to September 2024, rents grew 4.3% nationally, less than half the rate of the previous year. London rents grew by just 1.7%. Strong growth in rents has stretched the finances of those living in the private rental sector (PRS), limiting the capacity for further increases. 

Nationally, we expect that the imbalance of demand over supply will continue to override affordability, at least in the short term, as there remains headroom to push spend on rent. This means we anticipate rental growth in the order of 4.0% across the UK in 2025.

The opposite is true in the capital. Here we have already seen the drag effect of affordability being felt in recent months. Households in the capital have, on average, spent two fifths of their gross income on rent over the past decade, but this rose during 2023 to a peak of close to 43%. 

While Londoners are accustomed to spending more of their hard-earned cash on rent, there comes a point where they can’t or won’t spend any more. This inflection point appears to have been reached, with slower rental growth through 2024 leading to a slight easing of affordability pressures. We expect that this trend will continue in the near term with rental growth of 2.5% in London in 2025, against income growth of 2.9%.

Beyond London, affordability has not become quite so stretched, with the average household spending 33% of their income on rent. This means there is capacity for slightly higher levels of rental growth, particularly in the near term. But the proportion of income spent on rent has climbed significantly against the long term average of 28-31%, and we do expect rental growth to slow to be more aligned with income growth by the end of our forecast period.  

Any easing in the market will be helped by a projected fall in net migration, which should reduce demand pressures. The ONS are forecasting that net international migration will fall to 315,000 by 2028, from a peak of 740,000 in 2023.

Buy to Let Landlords: Should I stay or should I go now?

It is very difficult to see where an increase in rental supply will come from in the next couple of years. A survey by the National Residential Landlords Association in June of this year suggested that far more landlords intend to sell property in the next 12 months than buy. 

Beyond this, the Renter’s Rights Bill continues to work its way through Parliament. This will bring forward a range of changes to the rental landscape, including the ending of Section 21 ‘no fault’ evictions, the abolition of fixed term tenancies, and a move to once a year rental increases. 

One key piece of legislation will be the requirement to upgrade the Energy Performance Certificate (EPC) rating of all privately rented homes to at least a C rating by 2030. Currently, only two fifths of privately rented homes meet this standard. 

Some landlords will make these improvements, particularly those planning to be in the market for decades to come. But in some cases it won’t make financial sense: either the landlord is already planning to exit or the cost of upgrades will be prohibitive. In some markets the amount of money required to bring the property in line with anticipated regulation is likely to exceed an entire year’s rental income. 

The choice to stick or twist is one all landlords will soon face. Should we see more landlords choose the latter then the further eroding of supply could mean that affordability once again takes a backseat. This would mean that rental growth could be stronger than we are currently forecasting.