Rental supply tap continues to produce a drip rather than the steady flow the market needs
The survey of 6,913 existing tenants reveals that, on average, the cost of a ‘rented-roof’ accounts for 38% of tenants’ net monthly income. The research also reveals that the gap between demand, as measured by search activity on Rightmove, and supply, as measured by available properties to rent advertised on Rightmove, is wider than a year ago as structural rental sector supply issues continue.
Search activity on Rightmove is up 43% compared with a year ago, while supply is down 3%, The high percentage of tenants’ income accounted for by rental payments provides new evidence of the extent to which tenants are feeling the rental squeeze.
This should provide food for thought for investor landlords eyeing-up further increases in rental returns despite demand continuing to outstrip supply and the on-going expectation from the majority of tenants themselves that rents will be higher in 12 months’ time.
Miles Shipside, director of Rightmove, comments:
“While the failure of rental supply to keep pace with tenant demand persists, fuelled by the needs of tenants unable or unwilling to buy, our research raises some interesting questions about how high the affordability ceiling is and how close we might be to it.
"Greater new investment in the rental sector would ease the pressure on rents but, currently, the rental supply tap continues to produce a drip rather than the steady flow that the market really needs.”
Rents may be hitting an affordability ceiling in some locations
Rightmove’s survey asked tenants to indicate the proportion of their take-home pay that is spent on rent, providing a unique self-reporting measure of the real ‘cost’ of renting. Tenants stated rent devours an average of 38% of their take-home pay.
For around one in three, more than half of their net pay is accounted for by the cost of rental accommodation. Average ‘rental-take’ is highest in the South East and London and lowest in Scotland and the North East.
Extremes are noted in and within commuting distance of London, with more than 60% of net income being allocated to rent by 16% of tenants in the capital, and 19% of those renting in the South East.
This is unique evidence of a rental squeeze that may be leaving some tenants with little or no headroom left to pay more. Indeed, many agents report that there is some evidence that lower offers are being made and greater tenant movement between neighbouring areas if one nearby is cheaper.
Shipside adds:
“While the rental bubble is unlikely to deflate as there is no readily acceptable alternative to the rented roof, it does appear to be approaching a limit in some areas. Agents report that the seemingly incessant demand is causing rental price pressure to spill over into other previously less sought-after areas and some tenants are attempting to negotiate lower rent.
"This is a clear sign that rents may be hitting an affordability ceiling in some locations and when it hits an obstacle, like water, it finds the path of least resistance and makes its way to other nearby areas with more headroom.
"It is an early warning sign of some over-heating and, as well as raising demand in cheaper locations, it will force some to find alternatives such as stay with parents or squeeze more people into smaller spaces.”
The majority of tenants expecting, or perhaps fearing, higher rents in 12 months’ time
Tenants fear the rental squeeze will continue, with 61% predicting their rents will be higher in 12 months’ time. This is marginally down on last quarter when 63% forecast higher rents. Interestingly, landlords seem to be more conservative in their higher rent expectations, with 47% predicting higher rents in 12 months’ time. This is down from 51% a year ago, an indication of some slight cooling in their rental expectations. A further 43% of landlords expect rents to be more or less the same in a years’ time.
Shipside comments:
“Landlords have been one of the main beneficiaries of the credit-squeeze over the last few years as, with the right strategy, they have had the opportunity to prosper as demand has soared, particularly from would-be buyers trapped in rented accommodation.
"However, in spite of the majority of tenants expecting, or perhaps fearing, higher rents in 12 months’ time, it is worth sounding a cautionary note and reminding landlords that it is important they do their homework.
"Our research suggests that landlords should perhaps be careful not to squeeze existing tenants too hard as demanding too much could result in voids and a situation where the replacement tenant is less willing to pay the rents demanded than those already in situ.
"Some agents are reporting signs that some properties are taking longer to rent if rents are pushed too high, and with prospective tenants trying some lower offers, there is a suggestion of a slight cooling in the market.”
Though the majority remain trapped renters, more seem content to rent
There has been a cultural shift in the last few years with increasing numbers coming to terms with the idea of renting as a long-term accommodation option. Rightmove’s recent Rental Britain report, produced alongside Savills, predicts that one in five households will be privately rented by 2016.
The proportion of those who would like to buy eventually but are happy rent at the moment has increased from 27% in the previous quarter to 32% this quarter. However, ‘trapped renters’ who woul
