s mortgage rates have increased there have also been rises in rents. It is usually asserted that rents have risen to reflect increasing mortgage rates for landlords. The question is why have rents increased?
Lets look at some figures.
The latest mortgage rates are 6.7% for two year deals and 6.2% for five year deals. (1).
Private rental prices paid by tenants in the UK rose by 5.0% in the 12 months to May 2023, up from 4.8% in the 12 months to April 2023. (2).
The Consumer Prices Index (CPI) rose by 8.7% in the 12 months to May 2023, unchanged from April. (3).
Growth in employees' average total pay (including bonuses) was 6.9% and growth in regular pay (excluding bonuses) was 7.3% in March to May 2023. (4).
Comparing the figures therefore, we see that rents are increasing at a rate below new mortgage rates, which themselves are below the overall inflation rate. Employee earnings are running above both rents and mortgages but below inflation.
Of course, it is not just the rate that matters but the addition in actual mortgage or rent each month and the share of income taken up by housing costs and different groups of employees have seen differences in terms of pay growth. Of course, average earnings are just that – averages. Latest figures from ONS indicate that growth in employees regular earnings in March-May was 7.3%. However, there were variations. In the private sector the figure was 7.7% while in the public sector it was 5.8%, the finance and business services sector saw the largest regular growth rate at 9.0%. (5).
Are mortgage increases pushing up rents?
It is commonly assumed that as mortgage rates rise, landlords will raise rents to cover their increased costs. But is this correct?
A recent report suggests that of the 5.5 million properties in the private rented sector, some 2 million or 37% are mortgaged. (6). Therefore most owners would not have to raise rents to cover mortgage costs, yet rents are increasing across the board.
Ian Mulheirn (7) considers that rent increases are linked to increases in earnings, in essence landlords look at what the market will support. As earnings rise then rents follow. Current data indicates that while earnings are increasing by 7.3%, private rentals are up by 5%. Rent increases currently trail earnings levels.
Conclusion
The evidence would strongly support Ian Mulheirn's view that rent increases are linked to earnings growth rather than changes in mortgage rates. Of course those on low earnings and/or with limited increases in earnings will find it more difficult to pay for or obtain rented property. Another factor influencing rents will be alternative sources of revenue. Where there is the option of renting out properties for holiday purposes there is the likelihood that rents will be higher.
Sources
(1) BBC, Mortgage rates: Six reasons why the pain isn't as bad as it could be, 16th July.
(2) Index of Private Housing Rental Prices, UK: May 2023, 21st June 2023.
(3) ONS, Consumer price inflation, UK: May 2023, 21st June 2023.
(4) ONS, Labour market overview, UK: July 2023, 11th July.
(5) ONS, Average Weekly Earnings in Great Britain, July 2023, 11th July.
(6) House of Commons, Treasury Committee Oral evidence: Mortgages, HC 1687, Tuesday 11 July 2023.
(7) Ian Mulheirn@ianmulheirn, July 14th. See also the debate about whether higher mortgage rates for landlords are driving rents - they’re not, rental demand is driving rents (i.e. income growth).
Extracts from sources
Earnings
Growth in employees' average total pay (including bonuses) was 6.9% and growth in regular pay (excluding bonuses) was 7.3% in March to May 2023; for regular pay this equals the highest growth rate, which was also seen last month and then during the coronavirus (COVID-19) pandemic period for April to June 2021.
Growth in total and regular pay fell in real terms (adjusted for inflation) on the year in March to May 2023, by 1.2% for total pay and 0.8% for regular pay.
In March to May 2023, average regular pay growth for the private sector was 7.7%, this is the largest growth rate seen outside of the pandemic period; for the public sector this was 5.8%, a larger growth rate was last seen in September to November 2001 (5.9%).
The finance and business services sector saw the largest regular growth rate at 9.0%, followed by the manufacturing sector at 7.8%; this is the highest regular growth rate we have seen for the manufacturing sector since comparable records began in 2001.
(5) ONS, Average Weekly Earnings in Great Britain, July 2023, 11th July.
Mortgages
Q65 Dame Angela Eagle: ... What I am trying to get a handle
on now is the pass through from mortgage interest increases into rental
increases for people who happen to be in the rental market. How quickly
do you think rate rises on buy-to-let mortgages feed through to rents?
Nigel Terrington: There is less of an immediate and direct effect than
people might think. If you look, there are about 5.5 million properties in
the private rented sector. According to UK Finance, there are 2 million
mortgages in that sector. That represents only 37%, so clearly there are
63% of people who do not have a mortgage. They are not experiencing
an increase in their funding costs.
(6) House of Commons, Treasury Committee Oral evidence: Mortgages, HC 1687, Tuesday 11 July 2023.
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