Rental bubble grows as demand doubles while supply drops

Miles Shipside, director of Rightmove comments: “Tenants are on the receiving end of this ongoing rental spike and increasing numbers are predicting more pain to come. Their gloomy prediction about their own deteriorating financial fate is backed up by the widening gap between search activity and available rental supply. Their pain is a landlord’s gain with a shortage of rental accommodation and continuing high demand further boosting landlords’ rental returns.”

Rightmove’s findings show that conditions for tenants continue to deteriorate:

– Changing sentiment of tenants. The proportion of those expecting rents to be higher in 12 months’ time is 53%, including 17% that predict rents will be more than 10% higher. Both figures are the highest we have recorded in the last two years of our survey. In addition, half of tenants (50%) were forecasting rental price stability in Q3 2009, but now just a third hold this view (35%), illustrating a considerable shift in sentiment towards expecting to pay more for the rented roof over their head.
– Continued ‘income-squeeze’. With the Consumer Price Index showing a 4.4% annual rise in living costs and the growth in average annual earnings currently at just 2.2%, this report’s findings show that tenants are in for a tough period, both in finding suitable accommodation and affording it. Indeed, likely rent rises will further limit their ability to save a sufficient
deposit, especially for the 52% that currently state that they would like to buy but cannot afford to.

Shipside adds: “In spite of the rising rent environment of the last two years, the majority of tenants still expect to pay even more a year from now. The rental ceiling of what some tenants can afford to pay appears to have some headroom left, despite their disposable incomes being squeezed from all sides.

While the hot competition in the market will help improve landlords’ rental returns, there are consequences to an over-inflated rental bubble. Over-stretching tenants’ finances beyond what they can sustainably afford will lead to a damaging growth in arrears and void periods.”

As tenants continue to struggle, Rightmove’s analysis reveals more good news for existing landlords:

– Supply-demand equation stacked in favour of landlords. The gap between rental demand and availability of supply continues to widen, swinging further in landlords favour according to Rightmove’s statistics on rental search activity versus available stock. Our index shows there to be more than twice as much demand for 12% fewer properties, when compared
with April 2009.

– Credit restrictions keep tenants renting. The current level of demand for rental property looks set to continue. Bank of England mortgage approval figures show buyer activity has remained muted at an average of below 50,000 approvals a month for the last two years. This is half the monthly average number of approvals seen between 2000 and 2007, forcing
many to look to the relatively inflexible rental sector. Indeed, 7 out of 11 UK regions are forecast to be first-time buyer ‘blackspots’. In these regions likely first-time buyer purchases are forecast to be below 20% of all sales transactions over the next 12 months, less than half the levels associated with a traditional and more balanced market mix. Given that an
increase in mortgage lending is highly unlikely in the current uncertain global economic climate, the high demand for rental accommodation looks set to remain.

Shipside comments: “Existing landlords are in the driving seat and are enjoying the ride of rising rents and low buy-to-let mortgage rates. Landlords who offer a good rental product will have their choice of quality tenants busy searching the market. To get onto the rental bus tenants have to make sure they have great references to prove that they will not only pay the rent on time, but also have a track record of looking after the property during their rental stay. The question is: Will this scenario attract enough investors to ease the supply issues that the rental market currently faces?”

Slightly more investor landlords expect to buy in the next year according to our survey, with 14% of all buyers intending to purchase in the next 12 months being investors. However, this is only marginally up on the 11% recorded a year ago, and indicates a continuing lack of new rental supply.

Shipside adds: “Investors are in a quandary and seem to be busy still weighing up their options rather than jumping into property to satisfy tenant demand. The uncertain global economic outlook, restrictions on buy-to-let lending, and a hope for even better yields are all good reasons for some of them to do nothing.”

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2 thoughts on “Rental bubble grows as demand doubles while supply drops

  1. Jonathan

    Demand for rentals continues to rise, however more residential properties are available for right now due to the market and property owners not wanting to sell.

  2. Jonathan

    Although rental demand continues to grow, as property owners are unable to sell their homes, many are opting for renting which has opened up the rental market greatly.

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