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PROPTECH-X ‘Proptech & Property News’: Zoopla report highlights rental unaffordability for single earners | UK property market nearing crunch point

Rental unaffordability for single earners hits highest level for over a decade – underlining the need for new investment into rental sector

  • The average rent for new lets has increased by £117 per month since last year, reaching £1,078 per calendar month. 
  • Rental growth now stands at 12% per annum – double earnings growth of 6% and accounting for 35% of the average income of a single earner (the highest level in over a decade)
  • Rents are increasing fastest in the UK’s largest cities with rents up 17% or £273 per month in London over the past 12 months – this is the same in major regional cities including Manchester (+15.6%) and Glasgow (+14.1%)
  • This is pushing many renters to look for smaller homes or consider sharing – with a jump in demand for 1-bed flats resulting from renters seeking better value for money
  • More investment in supply is the primary route to moderating rental growth and boosting quality and choice for renters 
  • Looking ahead to 2023, if rental growth continues at the current rate of 12% – the proportion of earnings needed to pay rent would be stretched even higher to 37%. However, growing unaffordability is likely to hit spending power with rental growth slowing to +5% next year

Rental unaffordability for single earners hits highest level for over a decade. This is according to Zoopla, the UK’s leading property destination, in its latest Rental Market Report. 

Rents show no sign of slowing – despite cost of living pressures

The average rent for a new letting has increased by £117 per month since last year, reaching £1,078 per calendar month – and accounting for 35% of the average income of a single earner. This is the highest level in over a decade and is exacerbated by the chronic demand and supply imbalance with the stock of homes for rent down 38% in comparison to the 5-year average and down 4% in comparison to last November. 

In stark comparison, rental enquiries per estate agency branch are 46% above the 5-year average with rental demand being further boosted by rising mortgage rates which is limiting access to homeownership for first-time buyers. 

The gap in rental inflation between new lettings and all privately rented homes is also widening. For the 75% of renters that do not move each year, rental increases are much lower at 3.8% in the year to October 2022 – slower than the growth in average earnings.* This gap is why a growing number of renters are renewing their rental properties and staying put to avoid rike hikes if they move – however, this trend is compounding the supply problems in the sector.  

Looking ahead to 2023, if rental growth continues at the current rate of 12% – the proportion of earnings needed to pay rent would be stretched even higher to 37%. This is unlikely, however, with the growing unaffordability of renting likely to hit spending power with rental inflation slowing to +5% next year

Rents in cities race ahead

Rents are increasing fastest in the UK’s largest cities with rents up 17% or £273 per month in London over the past 12 months. This is also the case in other large regional cities including Manchester (+15.6%), Birmingham (+12.3%),  Glasgow (+14.1%), Bristol (+12.9%) and Sheffield (+12.4%).

A key trend in all these cities is the demand/supply imbalance over the past year – underpinned by large student populations and the fact all these cities are major regional employers. 

Rental growth is lagging in smaller cities with Hull, York, Oxford and Leicester recording slower growth of less than 8% although this level is still higher than the rate of earnings growth (6%). 

Supply side boost needed to moderate rents

More investment in supply is the primary route to moderating rental growth and boosting quality and choice for renters. This structural supply problem stems from economic and policy factors – the stock of homes for rent has not grown in size since 2016, holding steady at  c.5.5m homes. This means more renters are having to consider a greater set of compromises when looking to secure a home.

Further proposed regulations and new rules on renting homes that are not at an energy efficiency rating of C or better from 2025 are good news for consumers – but likely to result in more private landlords selling properties that are expensive and will require more investment. 

However, headwinds in the sales market will also play a role, as some landlords looking to sell their properties may now reassess and continue to rent them to tenants in the near term. 

Wider structural issues in the rental market are evidenced by the continued increase in the number of adults aged 20-34 years staying at home (3.6m in 2021)** rather than incurring rental payments to live independently. Policymakers need to encourage good landlords of all types and sizes to stay in the market and deliver much-needed supply.  Increasing investment in the private rented sector is the only way to ease the affordability pressures on renters in the medium term and create a more sustainable rental market

Richard Donnell, Executive Director at Zoopla comments: “Renters are paying the price for low levels of new investment in private rented housing over the last six years.  A chronic lack of supply is behind the rapid growth in rents which are increasingly unaffordable for the nation’s renters, especially single-person households and those on low incomes.  Many are also staying put to avoid the worst of rent increases.

“Renters are having to adopt a range of strategies to deal with rising rents. We have seen a rapid increase in demand for 1 and 2-bed flats while some renters are now considering sharing a property to cover the cost of rent. Others may now need to stay at home with parents or relatives for longer until they can afford to rent privately. 

“Only a big increase in investment in the sector will ease the pressure on affordability and boost consumer choice. In the short term, we expect the growing unaffordability of renting to reduce rental increases in 2023 to 5%.” 

Michael Cook, Group Managing Director for Leaders Romans Group comments:

“Currently there is simply not enough affordable housing in the market. The PRS has been filling the huge void left by an undersupply in social housing and Government needs to work with the many good quality landlords in the sector rather than against them. They should be actively policing existing legislation, rather than continue a dual-pronged approach of new legislation and taxation, which is pushing much needed good landlords out of the sector and driving average rents due to a lack of supply. The costs go up for the good guys and the rogues continue to operate illegally and with impunity due to inefficient and unfunded policing from Local Authorities. We will see the rental market reach a tipping point where the average monthly rent can’t go up anymore and still be affordable. The knock-on effect of this is that landlords will not receive monthly payments from tenants, which will impact their ability to pay their mortgages, and as for tenants, they will be left in a position of being unable to find affordable accommodation. 

“As property sales slow, the number of people continuing or returning to rent is rising, causing an even greater supply and demand imbalance within the rental market. The gap in the supply of rental properties is making properties more desirable, creating a pronounced demand in the market. For example, the competition to rent high-quality flats is reflective of greater instability in the mortgage market, which will certainly continue as we navigate through the recession.”

 “Policymakers need a workable, budgeted build plan for social housing and in the meantime make concessions for good quality landlords, to incentivise them to remain in the market and help stabilise the PRS, whilst cracking down on those that remain non-compliant.”

Crunch point for UK property market looms

As the UK’s 13-year property bull market comes to an end, a whole new set of conditions, assumptions and expectations are taking hold.

PRESS RELEASE: Will 2023 prices fall by 5%, 10%, 15% or not at all? Will the Bank of England push up base rates to (and beyond) 5%? Will lenders cut back, spooked by uncertainty and volatility?

Down valuations on the up

In 2022, a new factor has plagued property transactions: the rise of the ‘down valuation’, where a surveyor values a property below its asking price, jeopardising the sale and prompting disputes between sellers and lenders.

“As markets change, we can probably expect this difference in opinion to widen,” says John Baguely at Countrywide Surveying Services. As early as August 2022, brokers noted valuations falling as far as 20% below agreed purchase prices, leading to fraught negotiations with lenders.

“There is a gulf between the reality of what buyers are willing to pay and what surveyors are willing to let go through,” adds Jonathan Hopper of Garrington Property Finders. At the Association of Short Term Lenders, CEO Vic Jannels believes down valuations result from surveyors “taking a severe view, with one eye on the future state of the market, including rental values.”

For lenders, including bridging finance providers, the advent of down valuations poses new challenges. It narrows the options for lenders to confirm exit strategies and potentially places them at greater risk.

Risk protection

Yet for the Royal Institution of Chartered Surveyors, the issue is black and white. “Valuers have a duty to report the market value of a property,” it states. This is liable to be different from what people are willing to pay. “This is not a down-valuation, but in fact protects the lender and the buyer from risk, by ensuring the loan is advanced on the basis of a professionally derived value.”

Whatever we call it, below-market valuations may seriously disrupt the property market in the months to come, as homebuying chains break under the strain of withdrawn lending. As Sara Griffiths, lending expert at Ratio Law points out, in a falling market exits become harder to achieve, meaning that both buyers and sellers face delays and get stuck in chains. “People lack the specialist skills to deal with these situations,” she says.

This is where bridging finance could play an increasingly important role. As Stephen Clark at Finbri explains: “In 2022, the most common use of bridging finance was to overcome a property chain break, surpassing its use to buy investment property. We anticipate this will continue into 2023, as down valuations restrict homebuyers options, together with falling house prices, rising interest rates and the cost of living.”

Auctions in action

As property prices dip, demand for property auctions increases. Here again, bridging finance can play a helpful role, enabling buyers to secure purchases in competition with cash buyers. Since the pandemic, auctions are now commonly conducted online, giving greater access to the sector, along with the newfound acceptability of electronic signatures.

“We have seen rising demand from auction buyers for bridging finance, enabling them to move at speed, with flexible terms,” adds Stephen Clark at Finbri. “Again, we expect this pattern to repeat itself through 2023, as more properties come up for auction.”

While UK interest rates began to rise in the third quarter of 2022, a total of £214.7 million in bridging loans was transacted in Q3, compared with £178.4 million in Q2 – an increase of 30%, according to the latest Bridging Trends report.

At the ASTL, Vic Jannels argues that bridging loans are at historically affordable levels. “Some brokers are offering rates below 6%, whereas the Halifax headline rate is above 6%. Bridging loans are extremely competitive at the moment,” he says.

This helps explain the rise in demand, along with shifts in the risk appetite of conventional lenders. “Borrowers who have had mortgage products withdrawn with little or no notice, or have lost their sale due to their buyers no longer fitting mortgage affordability criteria, have turned to short-term funding solutions to ensure their purchase can go through as planned,” says bridging finance expert Stephen Watts.

Unbreaking the chain

Among the causes of these disruptions are the ‘down-valuations’ noted above, together with buyers becoming more cautious, as the direction of the property market grows less predictable. Whereas 24% of bridging loans were taken out for investment property purchases in Q2, this figure fell to 16% in Q3, overtaken by customers seeking bridging finance to overcome chain breaks.

So far, there have been few reports of widespread home repossessions. Yet as thousands of fixed-rate mortgages expire, followed by sharply higher monthly payments, combined with falling house prices and an economic recession, this may once more become a feature of the UK market. Compared with previous downturns, today’s homeowners have relatively high levels of equity in their properties, making them less liable to fall into negative equity.

“The biggest worry is households on shorter-term fixed rates due to expire in the next 12 months, rolling off sub-1% mortgages that are set to jump up to somewhere around 6%,” says mortgage expert Lewis Shaw. “For an average sized mortgage loan, this could be an increase of £600 per month.”

Given the government’s willingness to subsidise pandemic-affected salaries, followed by hugely expensive energy pay-outs, some believe that money will be found to prevent widespread repossessions, especially with a General Election in prospect in 2024.

It would be brave to depend on this outcome, however, given the government’s newfound focus on budgetary responsibility and cost-cutting.

Whatever 2023 brings, it is likely to be a year of recalibration, as the 13-year property party gives way to sober reflection. Like hangovers throughout history, though, it will leave many with severe headaches, determined never to put themselves through such misery again.

Then that same evening they’ll be down the pub ordering a pint.

Press release distributed by Pressat on behalf of Finbri.

Proptech and Property News in association with Estate Agent Networking.

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Andrew Stanton Founder & Editor of 'PROPTECH-X' where his insights, connections, analysis and commentary on proptech and real estate are based on writing 1.3M words annually. Plus meeting 1,000 Proptech founders, critiquing 400 decks and having had 130 clients as CEO of 'PROPTECH-PR', a consultancy for Proptech founders seeking growth and exit strategies. He also acts as an advisory for major global real estate companies on sales, acquisitions, market positioning & operations. With 100K followers & readers, he is the 'Proptech Realestate Influencer.'