Analysing rental housing sector in the UK

A significant proportion of UK residents prefer to rent flats and houses – it has always been affordable financially and convenient for periodic moves. However, the market has suffered a serious shock due to the COVID-2019 pandemic and the current situation differs significantly from the pre-Covid one. Anyone looking to rent out their property, as well as those planning to take a flat soon, should familiarise themselves with the current trends.

Current state of the property rental market

The London property market is undergoing a serious crisis in the availability of properties for tenants. Such conditions are atypical for the British economy, which attracts the attention of the government and private companies. Various studies are being conducted to determine the causes and find solutions to the situation. Two main problems have now been identified:

• reduction in the number of residential properties put on the market;
• increasing rent levels, well above the pre-commissioning levels.

Life in the UK capital is largely dependent on the property rental market. 30% of residential properties are rented and are not used by their owners for living. More than 2.7 million Londoners live in rented homes. Therefore, as the rental market changes, other areas of the economy also feel the changes due to the need for people to find affordable accommodation and the means to pay for it.

Studies of the rental property market are conducted periodically, which is necessary for an objective assessment of the situation. And if in the pandemic negative changes were expected, in subsequent periods the business expected a gradual recovery of previous growth rates, as well as a positive development of the situation as a whole. The first disappointing reports appeared in Q1 2022, when the volume of property let was 35% lower than in the same period before the onset of COVID-19. Such data alarmed market participants and forced to turn to a more detailed analysis of what was happening.

The large-scale study of the situation included analyses of rental market data, surveys, interviews of market participants, and the organisation of focus groups to discuss the current situation. The work was conducted with all segments of the market in order to compile the most complete picture. However, special attention was paid to the part of the property that is most often rented by the population. The results of the survey clearly show that the situation in the rental market is deteriorating: families with low income are finding it increasingly difficult to find suitable properties for themselves and more difficult to cope with timely payments. There are risks of an increase in the number of people without permanent residence.

Key findings from analysing the private rental market in London

Part of the findings contains a list of factors negatively affecting the residential property rental market in the UK and in particular in the UK capital. The most significant are:

• The volume of lettings of the most sought-after properties (predominantly 1-4 bedroom flats) fell by 41% compared to the number of lettings across London in 2017. The overall trend outside of London is slightly better, but also shows a negative trend – the market shrank by 33%;
• comparing the periods from January to March 2017-2019 with the same period in 2023, there has been a 36 per cent decrease in 1-3 bedroom properties for rent in the capital and beyond;
• The segment of houses with 4 bedrooms suffered the most. Such offers became less by 46.6% in the study in the same time period;
• rents rose by almost 20 per cent in February 2023 compared to March 2020. Landlords are likely to continue to raise rents due to a reduction in the number of options available.

The UK government is implementing the Local Housing Allowance (LHA) programme – a special housing allowance for tenants whose income is low and who cannot afford to pay their rent. This measure is quite widespread: about 300 thousand families have proved the need for help and use the support of the state, providing landlords with timely payment of obligations. The study of this part of the service consumers also aroused interest, as the state refused to raise subsidy rates in April 2020 and has not changed its decision to this day. Landlords, having evaluated the measures taken, have reduced the number of residential properties that could be rented using LHA housing benefit. The Rightmove portal was chosen to assess the impact of this factor: in 2020-2021, 18.9 per cent of properties could be rented using LHA procedures, whereas in 2022-2023 only 2.3 per cent of residential landlords are allowed this option.

The conclusion of the study also lists the factors why the market is suffering from a shortage of affordable rental options:

• A significant number of homeowners prefer to sell their property rather than rent it out. Due to this phenomenon the sale and purchase market is growing significantly, in recent periods it has doubled and this is not the limit;
• changes in the political arena have increased property maintenance costs. Those owners whose offers were the lowest, making them consider selling, are less resistant to rising costs;
• If previously tenants preferred to periodically change their places of residence, adjusting to their rhythm of life (change of job, need for kindergarten, school, etc.), now it has become more difficult for them to find a suitable option at an affordable cost. Therefore, residents are moving much less frequently, which also reduces the number of properties entering the rental market.

It is premature to assert that current trends have the prospect of becoming permanent operating conditions. However, analysis of the data shows that the rental property market in the UK is currently shrinking. It can also be assumed that in the short term we will not have to expect a sudden improvement in the situation.

The problem of lack of housing for the poor

In addition to landlords, the shrinking affordable property market has also caused problems for the low-income population, which in turn is causing difficulties for the state and homelessness services. The crisis in the social sphere is gaining momentum:

• people have problems with the current payment for the flats, which jeopardises the retention of living in them;
• There has been an increase in the number of people becoming homeless;
• there is a shortage of suitable options for temporary accommodation of homeless people;
• the amount of funds needed to solve problems exceeds the funds actually available to social services.

Thus, the negative changes in the UK rental property market have a direct impact on the ability of authorities to address the housing shortage. There are not enough social housing properties to accommodate those without homes, so social rented flats could help to improve the situation, but there are fewer and fewer available options on the market. Also the rising rents do not allow social services to provide suitable accommodation for all those in need.

The lack of real ways to radically change the situation and get out of the social crisis in the near future leads to the fact that the number of homeless people only grows, and local authorities are less and less able to deal with the problems on the ground.

At the moment London Councils reports about 166 thousand residents of the capital placed in temporary accommodation centres. If we compare this number with anything else, there are exactly the same number of people living in some London boroughs, and smaller towns such as Oxford and Blackburn have a similar number of residents. Already current estimates suggest that borough authorities have to spend around £52m each month to resolve the problem.

Proposals to address the housing crisis

As a conclusion, the reported study contains several proposals that would contribute to a way out of the current difficult situation on the rental property market. Amongthem:

• Raise the rates on housing subsidies for low-income citizens to the market level, which has proven to be the most workable measure;
• Develop bonuses for landlords who would rent flats at a lower price, such as offering favourable mortgage interest rates or reducing the tax burden on rental income;
• Provide local authorities and social organisations with additional funding to purchase houses to accommodate families left homeless.

These measures could give a breath of fresh air to the industry in the short term, buying time for more global change. However, it is not possible to expect that they could completely solve the existing crisis – more serious measures are required.

From time to time the legislation on tenants is reviewed, and it is planned to abolish the possibility of eviction under Article 21. At the same time, the state is trying to ensure that the measure does not discourage potential landlords from renting out property.

It is also expected that the government will develop a long-term strategy for the development of the residential rental property sector. Here it will be appropriate to build additional properties oriented towards social renting. This is the most effective way out of the current situation, but it is inevitably complicated by the duration of implementation, because the construction of houses requires significant resources. Therefore, it is important to start applying today those measures to alleviate the situation that are available in the current realities.

The residential rental property sector in the UK is experiencing years of significant crisis. The number of properties available to the public is well below demand with rents rising steadily. The government is in the process of developing a market resolution plan, but it has a long-term perspective. Some measures are designed to alleviate the situation, but it is impossible to do without them, as the problem is quite large. At the same time, the market for buying and selling real estate is growing, where it is possible to acquire interesting options for the subsequent organisation of one’s own rental business.