Rental growth hits 30 month low – does it still pay to be a landlord?

Annual rental growth has hit its lowest level for almost three years, research suggests.

It is a new blow for landlords who have already been hit by a tax clampdown on property investing in recent years, reducing the benefits of buy-to-let.

Data from tenant referencing firm HomeLet shows annual rental growth slowed to 6.9% in May - the lowest level since August 2021 - and was up just 0.2% on a monthly basis. Renters are still paying a record £1,297 on average though.

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Investors already face paying higher stamp duty on purchases and mortgage interest relief has been restricted to the basic rate of tax, while capital gains tax allowances have been cut for those looking to sell and exit the sector.

Many could justify remaining as a landlord due to rental profits, but higher buy-to-let mortgage rates are now closing that gap and the cost of living crises means renters are also reaching the limits of what they are willing to pay.

It follows Zoopla's latest Rental Market Report, which highlighted that slowing tenant demand and affordability constraints have pushed rental growth to its lowest level for 30 months.

The property website found growth in rents was 6.6% in April, the lowest level since October 2021.

The figure is down by 10% this time last year.

The average monthly UK rent now stands at £1,226 per month so even if growth is slowing, it is worth comparing if it is cheaper to buy a property if you can afford the deposit.

Zoopla says the slowdown is due to demand softening over the past year.

Rental demand is down 25%, according to Zoopla, while supply is up by a fifth, putting pressure on how much landlords can charge tenants.

However, there are still a third fewer homes for rent compared with the pre-pandemic years and 15 people are chasing every home for rent, more than double the pre-pandemic average of six people. 

Meanwhile, data from Foxtons for the London market suggests average rent was £577 in May 2024, slightly behind the £606 average in May 2023.

Estate agent trade body Propertymark says it is no surprise that rental growth is slowing. 

“As legal and financial obligations increase for landlords, it’s no surprise that many are turning elsewhere to invest their money,” says Nathan Emerson, chief executive of Propertymark.

“A priority for the new UK government should be to support and incentivise landlords to invest, not to deter or penalise them like we’ve continued to see in the past.

“We want to get rent levels back down to sensible and affordable levels for the nation, and without a boost in supply, this is unlikely to happen.”

The state of the UK rental market

A lack of supply and high demand used to make buy-to-let an attractive investment.

It has lost its shine recently due to tax restrictions and now landlords are facing a slowdown in rents as tenants can no longer afford the high charges.

Rental growth has slowed annually but has fallen over the past quarter across several regional cities due to localised supply and demand changes and affordability constraints in certain cities. 

The biggest drop in the three months to April was in Nottingham, where rents were down 1.4% on average, compared with a 1.1% drop in York.

Rents have also fallen by 0.4% in York and Glasgow and by 0.3% in Cambridge and London

“These are modest falls in the context of the rapid growth in rents recently, but it is clear evidence that rental market dynamics are starting to turn in some markets,” says Zoopla.

There is also an inner/outer split in the capital.

The Zoopla research suggests rental growth has slowed the most in inner areas with rents in Westminster and Tower Hamlets up by less than 2.5% over the last year and posting modest quarter-on-quarter declines.

In contrast, annual rents are up by over 10% in outer  London areas such as Barking & Dagenham, Redbridge and Havering where average rents are 20% below the London average. The average rent in London is now £2,122, still significantly above the UK average of £1,226.

Applicant demand saw the expected seasonal rise in month-on month demand, with a 20% increase from April. In Q2, applicant demand has been much closer to the trends in Q2 2023. It is expected that volumes of applicant demand through the summer months will remain similar to last year.

Data from London agent Foxtons also suggests a surge in supply could keep rental growth down.

The agency brand saw an increase of 36% in listings between April and May, up 10% annually.

Will rents fall in 2024?

Commentators expect rental growth to slow rather than drop this year.

This is because while demand continues to outstrip supply, there is a limit to what tenants can afford to pay especially with household bills remaining high.

There are already areas where rents are falling.

HomeLet's data suggests rents decreased in the North East (-1.6%), South West (-1.4%), Greater London (-1.3%), and Yorkshire and Humberside (-0.5%) on a monthly basis during May.

Zoopla has predicted that rental growth will slow to 5% this year, a long way from the double-digit returns that property investors have previously enjoyed.

This is being driven by changes in demand and affordability, rather than any expansion in supply which should be a key focus area for any incoming government, the property website says.

“Rents continue to grow faster than average earnings although the gap is much narrower than a year ago,” says Richard Donnell, executive director at Zoopla.

“Rental demand continues to run well ahead of available supply which is keeping the upward pressure on rents but there are some areas where rental growth has stalled.”

He highlights that the number of private rented homes has been static since 2016 which has compounded the rise in rents over the last three years. 

“Growing the supply of rented homes, both private and affordable, should be among the top housing priorities for the next government,” Donnell says.

“A healthy private rented sector is vital for economic growth and a more balanced housing market. More supply is the fastest route to easing the pressure on renters and improving the overall quality of rented homes.”

Adam Jennings, head of lettings at Chestertons agrees that there has been a “momentary slowdown” in the capital but suggests more tenants will start their search over the summer months.

He says: “It is therefore only a matter of time before demand levels outgrow supply to a degree that triggers rents to go up again.”