5 October 2022

Could a house price crash tame the UK’s depraved rental market?

What renters really need is more housing supply and more stability.

Illustration by Oivind Hovland / Ikon Images

Last month Jamie Murphy was browsing a property website when he came across an advert for the rented Wandsworth flat in which he still lived. He had given notice to move out, but the price shocked him: his landlord had almost doubled the price, from £1,700 to £3,375 a month. Murphy blamed “the insanity of London’s rental market”, but tenants have reported similar – and worse – situations in Manchester, Brighton, Bristol and across the UK.

A rental market that was disrupted by the pandemic has now become even more frenetic, with would-be tenants arriving at viewings to find themselves in queues of 25 people or more. Others have told of being gazumped by rivals offering 18 months’ rent up-front. For renters, the largest cost to disposable income is also subject to the highest inflation: the average rent, according to Rightmove, is at a record £2,257 a month in the capital (£1,159 a month outside), up 15 per cent from the same time last year.

Simultaneously, the cost of borrowing is rising fast. More than 1,000 mortgage products were pulled from the market following the turmoil of the mini-Budget on 23 September, and economists have predicted very significant falls in house prices as demand for homes plummets. Analysts at Credit Suisse have forecast an average price drop of 10 to 15 per cent.

During previous financial crises rents have fallen: research by the estate agent Savills has suggested that as the economy plunged in 2009, rents in the UK dipped 2.2 per cent. During the downturn of the early 1990s, US rents suffered a similar fate, dropping 1.4 per cent. Could a recession now come with a silver lining for the UK’s beleaguered renters?

Here’s the scenario in which things might improve: as mortgage affordability drops, demand in the property market falls, meaning those who need to leave their homes – because they are moving to a new area for work, or because their family is expanding and they need extra space – can’t get the price they were hoping for. Instead, they put their homes on the rental market, becoming accidental landlords in the process. “That would provide more stock on the lettings market,” says Katinka Hill, regional director of central London lettings at the estate agent Chestertons.

An increase the number of homes available to rent would provide a solution to one of the rental market’s most inflationary problems: lack of supply. In the past few years new regulations governing landlords – from the government’s decision to scrap relief on mortgage interest payments to new energy efficiency rules due to come in in 2026 – have led landlords to exit the market, or to switch their properties to the less predictable but potentially lucrative Airbnb. One study suggested the number of homes for rent had fallen by 40 per cent since 2019. The reduction in numbers has led to tenants being asked to pay “ridiculous prices”, says Hill.

The solution may not be as simple as that, however. If mortgage rates are rising – and economists are currently expecting the base interest rate to reach 5.5 per cent next year, meaning mortgage rates would be even higher than that – any landlord looking to remortgage in the coming months will be tempted to pass those costs on. The lucky recipients of that: their tenants.

Part of the reason rents are rising so steeply now is that many landlords are exposed to interest rates. Research by Hamptons International, an estate agent, indicates the Bank of England’s most recent base rate rise to 2.25 per cent has taken the average landlord’s annual net profit down from £3,198 to £212, for those with mortgages. If the base rate rises to 2.5 per cent, that will fall to a loss.

“I think a lot of landlords are going to either try to up the rent as much as they can to ensure that they are still making money on their buy-to-lets, or they’ll have to try to pump a little bit more equity into those properties to bring their mortgages down,” says Aneisha Beveridge, head of research at Hamptons. “Or, as a last resort, I think we’re probably going to look at some landlords having to having to sell up over the next year or so.” This would make the situation worse by reducing still further the supply in the rental market – which, in turn, would push up rents.

Last week’s market turmoil also complicates another supply factor: new-build homes. In recent years the build-to-rent market, which tends to focus on affordable homes, has increased significantly; last year more than £4bn was invested in the market, the most on record, with almost 116,000 homes in development. But as the cost of developing those homes rises – thanks to inflation and now borrowing rates – developers may think twice about going ahead with their projects.

“A certain type of developer might realise they bought land for x and it’s suddenly worth y, and they don’t want to crystallise that loss,” says Pete Gladwell, group social impact and investment director at Legal & General. “So they might sit on it for a while. The typical short-term profit on cost model that the property industry works on does not fit well with this particular set of circumstances.”

It’s worth pointing out that at some point, as Hill suggests, rents will have to stabilise. The cost-of-living crisis means the upper limit to which renters can go is likely to fall – if landlords push prices up too far, their homes will simply be left empty.

But will renters benefit from falling house prices? It’s unlikely. As with the rest of the housing market, considerably more supply and, ultimately, a more stable economy will help renters the most. Until then they’ll remain at the bottom of the property food chain.