Rents In The UK Are Escalating As A Result Of Rising Mortgage Prices


Rents In The UK Are Escalating As A Result Of Rising Mortgage Prices

House prices may be dropping as interest rates rise, but tenants face no relief as housing shortages pinch.

While private rents in the UK have surged to record highs, making life difficult for renters, the for-sale sector has slowed dramatically and property prices have begun to decrease, with steeper falls projected for next year.

The latest Nationwide home price index, released this week, coupled with Bank of England mortgage lending statistics, could give more insight into the depth of the UK housing downturn.

Even before the Truss government’s terrible mini-budget brought the pandemic-era housing boom to an end, the market was cooling, and mortgage rates were creeping up.

Mortgage rates soared to well above 6%, a level last seen in 2008, adding hundreds of pounds to monthly payments and driving a drop in demand. Unsurprisingly, the first monthly reduction in home prices in 15 months was recorded in October, with a 0.9% drop, the highest since June 2020.

Expensive mortgages have inhibited many first-time buyers, who are now renting instead in the expectation that interest rates will fall in the new year, resulting in more competition in the rental market, according to property website Rightmove.

However, this is not the sole factor for the rise in rental prices. According to Andrew Wishart of Capital Economics, tenants who work from home prefer to live alone if they can afford it, rather than in a crowded house share. In 2020-21, the number of persons renting a home alone increased by 530,000, while the number of people renting in a family of three or more decreased by 2 million.

Wishart believes that rising living costs might help to reverse this tendency. “But with the average tenancy lasting four years, it won’t happen overnight,” he adds, adding that buy-to-let landlords are facing significant financial pressure in the coming years, and many may sell up, further lowering supply.

The scarcity of available rentals has, predictably, increased the amount tenants are willing to pay. Foxtons, a London estate agency, reported a 22% year-on-year increase in rentals in the capital, for the first time in the nine months of 2022. The average weekly rent has risen to £571, a £100 increase from the start of the year.

In the third quarter, there were 30 new tenants for every home advertised, which is almost three times the previous levels. At the same time, supply has dwindled, and new instructions from London landlords fell by 18% in the first nine months of the year compared to the same period last year.

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”.

Supply issues have been compounded this year by an increase in international student renters and corporate rents, as well as 11% of landlords selling their homes at the conclusion of a tenancy.

According to Rightmove research published last month, advertised rents have risen considerably higher in certain other cities and towns. These include Newbury, Manchester, and Cardiff, which have all had yearly increases of 20% or more. Rents are anticipated to rise even more next year, while house prices are expected to fall by 5% to 12%, according to numerous analysts.

According to Capital Economics, property transactions will fall to their lowest level in a decade in 2023, with the average house price falling by 12%. Rightmove predicts a lesser loss of up to 5%, while JLL predicts a 6% drop.

Meanwhile, interest rates are expected to rise by another 50 basis points to 3.5% in mid-December, according to the Bank of England. Rates are likely to peak at 4.25% next spring, which is less than previously predicted.

“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.

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