Renters can expect further rent increases next year, but they could get some respite in 2025 as rental price hikes are predicted to ease and stop outpacing growth in people’s incomes.
Savills forecasts average rents to rise 6% in 2024, mainly due to the supply-demand imbalance in the rental market.
However, the agency says that rents could rise by just 2% in 2025; welcome news for many tenants, especially given that Savills currently estimates that the average renter household is spending 35.3% of their income on rent, up from 33% 2021-22.
Somewhat alarmingly, rents in London take up a much higher proportion of income – at 42.5% on average, according to Savills.
Although rents are unlikely to stop rising in cash terms, the firm is expecting the pace of rent rises to slow sharply.
Savills says that renters in the capital have now exhausted their capacity to bid higher, and as a consequence, month-on-month rental growth has dropped from an average of 1.2% in 2022 to 0.6% so far this year – and is likely to remain lower than the UK average over the next 18 months.
Emily Williams, director in the Savills residential research team, commented: “Homes to rent continue to be in significant short supply.
“The end of a series of national lockdowns sparked increased rental demand in mid-2021 that has consistently outstripped supply ever since.
“At the same time, the rising cost of debt has impacted the profitability of many mortgaged landlords. This, together with a changed tax and policy environment, is forcing an increasing number to sell their properties.
“As a result, competition for stock is tough, and tenants are having to bid upwards to secure a tenancy, supported – but only in part – by a strong growth in incomes, fuelling rents upwards in the short-to-medium term.”
Williams said it is hard to see where an increase in rental supply will come from in the next couple of years.
She added: “Higher borrowing costs will also keep would-be-buyers in the rental sector for longer, underpinning demand, and while some landlords will be able to transact in cash to avoid the higher cost of debt, this is unlikely to move the dial on supply.
“Any significant increase in stock in the sector will be delayed until 2026 and beyond, when interest rates have fallen more substantially.”
