Renters must be banging their heads against the wall by now as they are being pushed towards smaller properties and lower running costs in the face of higher rents and continuous rising living costs, which include rising energy prices. This is according to Zoopla, the UK’s leading property destination, in it quarterly Rental Market Report.

Richard Donnell, executive director at Zoopla comments: “Rents have surged ahead over the last year but there are signs that the pace of growth is peaking and set to slow into 2023. Renters are responding and looking for smaller, better value for money homes to rent with an eye on energy costs as much as rental levels.”

“What the rental market needs to combat these challenges is more new homes for rent. Greater regulation has seen less new investment and a small but growing number of landlords selling up, meaning the rental market has stopped growing since 2016.”

Donnell concludes: “There is a risk that more regulation to improve standards or potential new measures to dampen rental growth, as proposed in Scotland, may compound the supply problem which is pushing rents up in the first place. Policymakers need to tread a careful path between protecting consumers and ensuring a decent supply of homes for rent.”

Chronic shortage of supply pushes renters higher

Accounting for 34.4% of the average income of a single earner, the average rent has increased by £115 per month since last year, reaching £1,051 per calendar month. This surge in rents is heavily affected by a severe supply and demand imbalance with the stock of homes available to rent standing at just half of the five-year average – while the average letting agent currently has just eight homes available to rent.

This chronic supply shortage is impacted by an increase in renters staying put in their properties to avoid rent hikes and landlords continuing to sell properties in the face of tax and regulatory changes. Currently, approximately 3 in 4 renters will choose to stay in their current property and although they will experience lower levels of rental growth of 4% or less – this will squeeze supply in the market as a result.

Additionally, there has been an acceleration in demand for one and 2-bed flats as renters feel the cost-of-living pressure and fewer renters looking for two and 3-bed houses. Outside of London, the average asking rent is £105 lower per month for a 2-bed flat compared to a 3-bed house.

The decisions and considerations weighing on the minds of renters are running costs and energy prices which are likely to play a role in the shift in demand for smaller homes.

When it comes to energy prices, the amount of gas to heat and run a purpose-built flat for a year is 40% lower than a terraced house and 25% lower for a converted flat. New-build city centre flats are also becoming increasingly appealing to renters seeking out smaller homes with lower running costs.

Annual rent growth nears its peak

Rental growth has increased over the last 12 months from an annual rate of less than 2% in July 2021 to 12.3% today, while rental growth is out-pacing earnings growth in all regions and countries of the UK. Rental growth is ranging from 7.6% in the North East to a staggering 18% in London – however, there are signs that rental growth is close to peaking.

Despite rents in London rebounding from a low base, the pace of rental growth in London is not sustainable at current levels with average rents in London presently 7.8% higher than pre-pandemic.

In a reversal of a trend seen during the pandemic, rental growth in urban markets (10.5%) is now outpacing that in rural markets (8.5%) as strong employment drives demand in cities.

The best performing urban markets are London (17.8%), Manchester (15.5%), Glasgow (14.4%), and Bristol (12.9%) – where rental growth is standing above the UK average of 12.3%. Rents are also rising faster at the top end of the market with asking rents for 2-bed flats escalating rapidly at the upper end (top 25%) of the market compared to the lower end of the market where demand is more price sensitive.

What’s the outlook for the rental market?

There is no real prospect of significantly improved rental supply in the near term as private landlords continue to sell off homes due to tax and regulatory changes. Renters renewing their tenancies will also amplify the fierce supply squeeze and keep upward pressure on rents into 2023.

Hannah Gretton, lettings director at LSL’s Your Move and Reeds Rains brands comments: “We are experiencing high levels of demand for rental properties with homes being snapped up within hours of hitting the market. With over 270 lettings branches nationwide, it’s a picture that is reflected up and down the country with particular demand in urban areas.

Gretton concludes: “On average, we are seeing double figures of enquiries per property with a one-bedroom property in Manchester last week receiving over 100 requests to view, highlighting just how busy our branches are and the challenges renters face when it comes to finding an appropriate property.”

There is headroom for some renters to pay more, especially outside the South East and London, however overall, the headline rental growth is expected to slowly taper over Q4 and into 2023.