Q3 2020: Rental Market Report (Hometrack UK, 2020)
Average UK rents outside London rose by 0.7% in the three months to September, taking the annual growth rate to 1.7%.
Rental growth remains in positive territory across most regions and cities in the UK. This is in sharp contrast to London, where rents fell by -3.2% in Q3, taking the annual decline to -5.2% at the end of December.
This two-speed market, is likely to be entrenched during the additional lockdowns in England and across the regions, which will exacerbate the trends which is causing the split in rental performance, especially as more people work from home.
Demand and supply
Rental growth is being underpinned in many areas by the continued imbalance between tenant demand and the supply of rental properties, with rents rising in most cities across the UK.
Renter demand has moderated from the highs seen in early summer after the first lockdown ended, but year on year, demand is still around 20% higher than in the same period in 2019.
The challenges in the mortgage market for first-time buyers trying to obtain a home loan, given the current squeeze on lending for those with smaller deposits, means that many of these aspiring homeowners will be staying in the rental market for longer, underpinning demand.
This comes as overall supply into the rental market from individual landlords has been constrained. Investment levels have fallen markedly since the additional 3% stamp duty was introduced for those buying a second property or investment property in 2016.
The return of students to University as usual in the Autumn will also have boosted demand in the rental sector. Rental growth is being underpinned where demand is outstripping supply. In the North East, rental demand was 54% higher in Q3 than the average in previous years, while supply is down 9% compared to the typical levels seen in Q3 in 2017-2019.
The region is seeing the strongest rental growth at present, at 3.2%. Rental growth is in positive territory in all other regions except Scotland and the West Midlands, which have other factors affecting the dynamics of the market.
In Scotland, rental growth in Glasgow is still positive at +2.4%, but in Edinburgh, the 1.6% fall in rents reflects muted tourism and the shift from short-lets to long-lets. In Aberdeen, the market has been affected by the travails of the North Sea energy industry.
In the West Midlands, rents in Birmingham, the largest rental market in the region, narrowly dipped into negative territory in September.
The city may be starting to feel the impact of changing working patterns, with demand in some city centres being affected by limited office attendance, as well as new-build supply coming into the market creating more choice.
There is also increasing sensitivity about rental levels in some regional and city markets due to muted earnings growth. Average pay in the private sector fell in real terms in April, according to the latest official data, and this pressure on wages is likely to have continued through the summer.
These factors could cause a gradual slowing in rental growth in the months to come, but the UK market outside the capital will still outperform London.
Change in average rentsZoopla research
Regional rental growth strongest where supply constrained Zoopla research
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