The rental market has experienced cooling growth rates following record peaks in 2023.  Despite this slowdown, rental growth is still outpacing inflation, with both the costs of new contracts and renewals rising.

Lettings agency Hamptons, part of Connells, says that average rent on a newly let property is projected to increase by 4.5% across Britain in the third quarter of 2024, a significant drop from the 10.2% growth seen in 2023.  

This slowdown in the rate of rental growth is partly due to lower mortgage rates and inflation, which have reduced the need for landlords to increase rent as much as last year, as well as squeezed tenant affordability.

Looking ahead to 2025 and beyond, rental growth is expected to continue softening, but remain above both house price growth and inflation in the long term. We’re predicting rents to rise 4.5% in 2025, followed by 4.0% in both 2026 and 2027.

This trajectory is driven by the continued squeeze on landlords’ profits due to higher mortgage and servicing costs, alongside higher barriers to entry given the rising stamp duty surcharge on second home purchases.  However, the pace of increases will be increasingly constrained by affordability pressures on tenants resulting from past steep rises and broader cost of living challenges.

While economic drivers will have the most significant impact on house prices, political risks, such as implementing the Renters’ Rights Bill, are expected to shape rental growth.

This legislation, along with other regulatory changes like EPC requirements, may lead to a further reduction in rental property supply as some landlords, particularly older investors, choose to exit the market.                    

Consequently, Hamptons reports that rental growth is predicted to remain above its long-term historical average of 1.8% annually and stay ahead of inflation.  Overall, we expect rents to rise by 17.0% between 2024 and 2027, outpacing house price growth of 12.5%.