Affordability Crisis means rent rises cannot continue...

Savills is warning that despite strong income growth, rising rents are stretching the finances of those in the private rental sector.

Savills now estimates that the average PRS household is spending 35.3 per cent of their income on rent, up from 33 per cent in 2021/22.

This is forecast to be stretched further in 2024, but thereafter rents will have reached an affordability ceiling, and further increases will not exceed income growth.

However, renters will still be left spending a higher proportion of their income on rent than at any point in the last 18 years.

But the market is already feeling the impact of hitting an affordability ceiling in London, where rents already take up a much higher proportion of income – at 42.5 per cent according to Savills.

Rents in the capital have grown 31 per cent in the last two years, and as a result, renters have already exhausted their capacity to bid upwards. As a result, month-on-month rental growth has fallen from an average of 1.2 per cent in 2022 to 0.6 per cent so far in 2023 – and is likely to remain lower than the UK average over the next 18 months.

According to the agency, more stock coming to the market, against steadying demand has caused prime rents to simmer. But there is a mismatch in landlord and tenants expectations. While more than half of landlords in London are still expecting five to 10 per cent rental increases, just a third of tenants only expect to pay up to five per cent more.

Savills adds that struggles for individual private landlords suggest that institutional landlords and the Build to Rent sector will play an increasingly important role looking forward.

However, it’s not plain sailing for BTR.

Jacqui Daly, director Savills research and consultancy, says: “The private rented sector appeals to institutional operators because it offers a secure long term income stream which is likely to rise with inflation and also ticks the social value box by providing a much-needed source of new housing.

“With the pool of renters expected to widen, there are opportunities for investors to provide both urban flats and suburban family housing to rent in the multifamily and single family markets respectively.

“However, the degree to which the Build to Rent sector can grow in influence will depend on how easily schemes can get funding in a challenging debt market and get planning consent in an arguably even more challenging planning environment.”