Supply and Demand Imbalance Drives Rental Market Surge: Over 20 Applicants Per Property

The UK rental market is expected to remain highly competitive for the rest of 2024, with rental prices projected to increase by up to 4%, according to Zoopla's latest Rental Market Report. Rental growth for new leases currently stands at 5.4%, surpassing the growth in average earnings at 5.1%. As of July 2024, the average rent is £1,245 per month, which is £63 higher than a year ago.

This demand surge is primarily due to the limited supply of rental properties, a consequence of reduced investment from private landlords. Although the number of homes available for rent has increased by nearly 20% compared to last year, the overall stock remains 24% below pre-pandemic levels.

Challenges in Property Investment and the Buy-to-Let Sector Affect Rental Supply

The buy-to-let market is facing significant challenges due to a decline in new investments from private landlords. Rental supply remains tight, with 21 people competing for each available property—more than double the pre-pandemic level. This shortage has fuelled a 30% rise in rents over the past three years. Increasing the supply of rental properties is critical to easing these pressures, but many landlords are opting to sell their properties instead.

Higher mortgage rates and regulatory changes dating back to 2016 have contributed to a consistent flow of landlords selling their properties. As of July 2024, 12.5% of homes for sale on Zoopla were previously rented properties.

The Impact of Potential Tax Changes on Property Investment

Landlords are already factoring in the Government's Renters' Rights Bill when deciding whether to remain in the rental market. Speculation about potential tax changes in the upcoming autumn budget could further encourage landlords to sell their rental properties, exacerbating the supply shortage and driving rents higher.

Although it is too late to sell in time for the autumn budget, any delays in tax changes could lead to a surge in landlord sales in the near future. This would further reduce the available rental stock, worsening the supply-demand disparity.

Rental Growth Strongest in Affordable Areas Near Major Cities

While rental growth has slowed in London and other major cities, it remains strong in smaller towns and cities where rental costs are more affordable. Areas adjacent to large cities have seen some of the fastest rental growth, with places like Kilmarnock and Kirkaldy in Scotland experiencing annual increases of 13% and 12%, respectively.

In England, cities like Wolverhampton, Oldham, Darlington, and Walsall have also witnessed double-digit growth in rental prices. These locations offer better value for money and are well-connected to larger urban centres, making them attractive options for renters.

Property Investment Outlook: Supply and Demand Disparity to Persist Into 2025

Despite a softening in the labour market and the fading of one-off pandemic factors, demand for rental properties is expected to remain above average for the rest of 2024 and into 2025. The affordability crisis in the housing market, particularly in southern England, is pushing more individuals to rent. The private rental sector will continue to absorb this demand due to a lack of affordable housing.

Richard Donnell, Executive Director at Zoopla, highlights the growing unaffordability of both buying and renting as key factors driving rental inflation. He stresses the need for policies focused on increasing the supply of rental properties to alleviate price pressures and improve choices for tenants.

Expert Opinions on Property Investment and Rental Market Trends

Industry experts agree that the rental market is unlikely to see relief without a significant increase in housing supply. Marc von Grundherr of Benham and Reeves and Tom Bill of Knight Frank both warn that tax changes and the Renters' Rights Bill may further discourage landlords from staying in the market, exacerbating the rental crisis. Meanwhile, Adam Jennings of Chestertons advises tenants to stay proactive in this competitive market to secure their desired property.

As the government introduces new legislation, ensuring that these changes do not unintentionally drive landlords out of the market will be critical in maintaining rental supply and preventing further rent increases.

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