Rent rises will outgrow house prices over the next five years

10th June 2022

Over the next five years rents are expected to grow faster than house prices (5% for rents and 4% for prices) according to research from the Royal Institution of Chartered Surveyors (RICS).

The research showed that demand from prospective house buyers fell in May 2022, a potential side effect of the rising cost of living and higher interest rates, although house prices in the short term are expected to rise.

Respondents reported that new buyer enquiries had fallen in May, with a net balance of -7%, down from much more positive sentiment in April (net balance +8%). Some respondents put this down to some buyers tightening their belts as the cost of living begins to have an effect, and May’s result brings to an end eight consecutive positive results for new buyer enquiries.

As such, the volume of agreed sales saw little change, with a flat picture reported. Sales expectations over the next three months are also predicted to be flat, (net balance +1%) from a rosier picture in April (net balance +10%). Looking over the next twelve months, expectations are that sales are set to decline with a net balance of -24% respondents commenting that they foresaw sales declining (down from -4% in April).

New instructions to sell homes were also largely flat during May, and there seems to be little respite for lack of supply in the future, with respondents citing the weakest picture since December 2021 for new / requested market appraisals. This suggests there is little prospect of more homes coming onto the market in the immediate future.

Given constrained supply, house prices continue to rise. A net balance of +73% of contributors reported an increase in house price during May. Broken down, all parts of the UK continue to see increasing prices, with growth exceptionally strong in Northern Ireland, Northern England and Wales.

Looking ahead, twelve-month price expectations did ease at the UK level for a third successive month. Although a net balance of +42% of survey participants still envisage house prices being higher in a year’s time, this is down from +78% in February and is the most moderate reading seen since January 2021. However, twelve-month price expectations remain positive across all parts of the UK at this stage.

In the lettings market, tenant demand continues to rise firmly according to a net balance of +48% of contributors – the same as in April. At the same time, landlord instructions continue to decline, with the latest net balance coming in at -13% following a reading of -16% seen previously. As a result, rental growth expectations over the next three remain elevated, returning a net balance of +58% in May.

Simon Rubinsohn, RICS Chief Economist, said “The increase in the cost of mortgage finance alongside growing concerns about the economic outlook is unsurprisingly having an impact, albeit a relatively modest one at this point, on buyer activity in the sales market.”

“Despite this, prices are viewed as likely to remain resilient into 2023. But as is often the case in these circumstances, the pressure is likely to felt more visibly in transaction levels which are seen as likely to slow as the year wears on.”

“Meanwhile, what is particularly striking in the latest RICS survey is both the current and anticipated strength in the rental market. New instructions of property to let continue to fall according to respondents to the survey while demand is still very strong leading to rental levels being bid higher and greater challenges for tenants who aren’t in the position to compete for the available stock.”

Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown said “Rocketing rents are already putting tenants under horrible pressure, and there’s every sign that the squeeze is going to intensify. Rent rises are expected to outstrip house prices over the next five years, as landlords sell up and tenant numbers boom.”

“Landlords are packing up and clearing out of the market. Some feel we’ve reached the top of the market and are keen to capitalise on higher prices while they can. Others are worried about more legislation and higher taxes making renting less rewarding. In London in particular, some are moving into the Airbnb market where returns are more rewarding.”

“Those landlords who are left, are in a position of real power, because the number of people looking to rent continues to rise. Rising house prices mean more people renting later in life, which in turn means tenant numbers are booming. In recent months, they’ve been joined by people who’ve sold up and are being forced to rent because they can’t find anything to buy.”

“With several potential tenants chasing each home, landlords are hiking rents and being pickier about who they accept. Tenants are keen to stay put to avoid the cost of moving and higher rents elsewhere, but some are being forced out by higher rents or landlords selling up.”

“It leaves renters in a horrible position. They already spend a significantly larger chunk of their income on housing costs than their home-owning counterparts, and runaway rising bills from energy to petrol and food means they can’t afford to pay more to rent their current home. More and more are being forced to move, which is horrendously expensive in itself.”

“Their new homes are likely to be smaller, and there’s been a growth in people renting a single room in a larger property to cut costs. Right now, we’re not seeing a boom in sofa surfing and a return to living with parents, but the agents think this isn’t out of the question.”