Rental market to outperform sales for years to come - new analysis

New long-term analysis by Hamptons says rental growth will cool over the coming years but will still outperform house prices between now and the end of 2025. 

The forecast says: “Landlords will be seeking to pass on higher borrowing and other costs to tenants.  Therefore, we are revising upwards our forecast for rental growth in 2022 to 6.0 per cent.  In 2023 and 2024 we forecast rental growth will slow to 5.0 per cent and it should moderate further in 2025 to 4.0 per cent.  

“The impact of the cost of living squeeze on tenants’ salaries will constrain rises to this level, however. London and the South East, where low-yielding landlords will be hardest hit, will see the strongest rental growth over the forecast period.”

Hamptons continues:  “Rental yields are likely to move upwards throughout the forecast period, reflecting the combination of weaker price growth and rising rents.  We expect gross yields to increase from 6.1 to 6.7 per cent nationally between 2022 and 2025.  Net yields, after all costs are accounted for, on the other hand are likely to remain broadly flat.

“Lower rental yields in London will make it harder for landlords to absorb rising costs than their counterparts in the North.  This is why we think the supply of rental homes in the capital looks set to shrink further, pushing up rents. Over the forecast period, we expect to see the yield gap between the North and South close from 2.2 to 1.8 per cent.”

However Hamptons - the high-end brand now owned by Connells - is warning that in the short term, landlords are the largest group likely to sell up over the rest of 2022.

Those sales - mainly by landlords who have calculated low yields from their investments - are likely to lead the sales market downwards over the next four months, ahead of what is likely to be a stagnating year in 2023.

The agency says delays to completions mean that the impact of higher interest rates and the cost of living are not likely to be visible in official transaction data until early 2023.  It expects around 12 per cent fewer sales in 2023 than in 2022, across all sectors - not just landlords.

“First-time buyers, who have been a key force in 2022 acquiring 26 per cent of all homes sold, will be most severely affected.  Such could be the impact on their ability to afford a home that it may return transactions back to 2013/2014 levels.  Meanwhile, cash purchasers in prime markets are likely to remain more resilient” says Hamptons.