Market Wrap #223: How Interest Rates and Housing Supply are Impacting UK Rents

The property market continues to be a topic of much discussion, and this week’s Market Wrap, episode #223, sheds light on some key developments. Let’s break down the critical points influencing the rental market and property trends across the UK.

Interest Rates Hold at 5%

One of the major highlights this week is the decision by the Bank of England to keep interest rates steady at 5%. This comes as a surprise to some, particularly with the U.S. Federal Reserve recently cutting rates by 0.5%. The expectation is that the Bank of England will likely reduce rates in November, as inflation remains stubbornly above the government’s target of 2%. However, the housing market remains positive, with optimism about property purchasing continuing despite the current interest rates.

Welsh Government Proposes Tax Cuts to Combat Brain Drain

In an exciting move, the Welsh Government is considering a 25% income tax cut to address the “brain drain” – the migration of skilled workers out of Wales. This proposal could potentially shift regional economies, making Wales an increasingly attractive place to live and work.

Rental Market Questions: London and Edinburgh Comparisons

One of the key questions this week came from a listener wondering if the reduction in rental properties in London is being replicated in cities like Edinburgh, which also face high rents and low stock. The answer? Yes, Edinburgh is experiencing similar issues, driven by housing shortages. Notably, old tenement buildings are being replaced by luxury flats with far fewer units, leading to a dwindling supply of affordable housing. This trend mirrors what is happening in London, where supply constraints continue to drive up prices.

Researching Property Trends: How to Stay Informed

If you’re looking to stay ahead in the property market, knowing where to find reliable data is crucial. We recommend subscribing to major research houses like Savills, Knight Frank, and JLL, which regularly publish in-depth reports on market trends. For those keen on a more hands-on approach, Property Data provides insights into various aspects of the market, and many platforms offer free trials.

Surge in Large Homes for Sale

An interesting trend has emerged on Rightmove, where the number of large homes (five-bedroom and four-bedroom detached properties) on the market has surged by 15% compared to the same period last year. This surge is particularly noticeable in coastal and countryside areas in the South East (up 21%) and the South West (up 20%). It’s believed that many people, who sought the rural life during the pandemic, are now looking to return to city living as rural winters prove less appealing. Additionally, improved mortgage rates, particularly for those with a 40% deposit, are driving activity in the high-end property market.

Rental Growth Outlook

While rental inflation in the UK has slowed to 5.4%, marking its lowest rate in three years, the picture is far from uniform. London, for example, has only seen a modest 2.5% increase in rents, whereas towns and rural areas are experiencing increases of up to 10%. There’s been an 18% increase in the number of rental properties available compared to last year, but stock remains 24% below pre-pandemic levels. The trend of landlords selling off properties has also reached its highest level since records began, driven not by a weak market but by older landlords cashing in on properties that have appreciated in value.

What’s Next for the Rental Market?

Despite a cooling in rental inflation, experts are predicting continued rental growth, driven by supply constraints and high demand. JLL forecasts that rents will rise by 3–4% in 2024, with cumulative growth continuing through the rest of the decade. Richard O'Donnell, Director of Research at Zoopla, points out that while rental inflation may have peaked, affordability challenges and low housing supply are likely to keep rents high for the foreseeable future.

Final Thoughts

With interest rates holding steady, high demand for rental properties, and a tightening supply, it’s clear that the UK rental market is in for continued growth. Whether you’re a landlord, tenant, or prospective homebuyer, staying informed is crucial. As always, we recommend thorough research and keeping an eye on regional trends as they can vary significantly across the UK.

Stay tuned for the next Market Wrap as we continue to dive into the key factors shaping the UK property market.