With interest rates continuing to increase and with the expectation that further rises are on the way, the costs of mortgages is also going up. Opinion in the property sector also suggests that higher mortgage rates will push up rents for renters as landlords seek to recoup higher costs. Yet the reality may be more nuanced than that.
What do the figures say? Latest data shows that
“Private rental prices paid by tenants in the UK rose by 4.8% in the 12 months to April 2023”. (1)
while
“Growth in regular pay (excluding bonuses) was 7.2% among employees in February to April 2023" (2).
As to why rents are rising and will continue to rise, according to this press release-
“A grim prediction from the Bank of England is forecasting that rents will rocket by 20% because landlords could be paying up to £4,000 more for their buy to let mortgage in 2023. The warning comes from the bank’s Financial Policy Committee which says that the monthly repayment facing landlords will rise by £175 – but for a fifth of landlords, the rise could be more than £300.” (3)
However, Ian Mulheirn presents an alternative view. He states
“… it’s interesting that the rise in rents is framed as the result of rising mortgage costs. Not how I see it at all. Rents are rising now because nominal earnings are rising - a demand side thing. Landlords are price-takers.”
He suggests that
“In practice nominal earnings growth averaging 6.7%* is driving rents up. And since some people aren’t getting decent pay rises right now - hello public sector workers - this means they’re facing increasingly unaffordable rents”.
and
“ …even though market rents have grown slower than average earnings - because housing benefit has been cut and social housing eroded.” Therefore rented housing has become less affordable. [Full analysis in @jrf_uk paper https://jrf.org.uk/report/housing
So to answer the question, why are rents going up - while higher mortgage costs put pressure on landlords to raise rents, their ability to do so is to some extent constrained by the ability to pay which depends on the earnings of renters. In some areas such as Cornwall, where there is an option of switching to holiday lets, some properties may be taken out of residential use.
Another factor influencing rents will be the demand for renting – influenced by households deciding to rent rather than attempt to purchase. Again, ability based on earnings capacity will be a factor here.
Sources
(1) ONS, Index of Private Housing Rental Prices, UK: April 2023. Statistical bulletin.
(2) ONS, Labour market overview, UK: June 2023, Statistical bulletin.
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