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Why is There a Shortage of Rental Properties in the UK?

By 6 min read • June 12, 2023

The UK rental property market is facing an unprecedented crisis.

A recent investigation by the BBC revealed that the supply of rental homes in the UK had contracted drastically, falling by one-third in the last year and a half. This steep decline has caused a surge in demand and inevitably driven the cost of rent up by an average of 11%.

Additionally, a report from The Guardian indicates a significant exodus of landlords from the market. In 2022 alone, landlords sold 35,000 more properties than they bought, reducing the pool of rental homes even further.

The UK’s current shortage of rental properties has been caused by a culmination of factors that affect both landlords and tenants. From regulatory changes and economic pressures to demographic shifts and the lasting impact of the Covid-19 pandemic, we’ll examine how each factor has shaped the current landscape of the UK’s rental market.

Housing Shortage in The UK

One of the most significant causes of the rental property deficit is the overarching housing shortage that the UK is experiencing. Over recent years, the government has persistently fallen short of hitting its target for the number of new homes built yearly. As a result, the housing market as a whole is undersupplied, a situation that has led to a surge in property prices across the board. Buyers and renters suffer the consequences of this shortfall, with increased costs and reduced availability creating a double-whammy.

There is Still a High Demand for Rental Properties

Adding fuel to the fire is the overwhelming surge in demand for rental homes. The same BBC investigation that revealed the diminishing rental property supply also bought attention that demand for rental homes has risen by over 50% above typical levels.

So, what’s behind this surge in demand? A variety of factors have helped to push demand to these unprecedented levels.

A key factor is the current economy. High living expenses and soaring property prices have priced many people out of the market for buying their own homes. As fewer people can afford to buy, they must rent instead.

Demographic changes have also had an impact on housing needs. There has been a rise in single-person households caused by an ageing population and changes in family structures. This trend has resulted in greater demand for homes, including rental properties.

Immigration rates in the UK have also reached record highs. New arrivals in the country often look for rental properties while establishing themselves in the country, increasing the demand for rental homes further.

An Unstable Economy Contributes to a Shortage of Rental Properties

An unstable economy has also significantly affected the UK’s rental property crisis.

A lethal combination of high property prices, a housing shortage, and strong demand, have priced many people out of the buying market, adding more pressure to a struggling rental market.

High property prices are also a double-edged sword for landlords. While they could provide higher capital gains in the long term, they deter many new landlords from entering the market. Many existing landlords are also being enticed into selling their properties to cash in on these high prices, further exacerbating the shortage of rental properties.

Growing mortgage and interest rates also increase the financial burden for many landlords, diminishing their profits and, in some cases, even pushing them into the red. Landlords with buy-to-let mortgages have been particularly hard-hit, facing 12 consecutive interest rate rises. Some landlords have found that the rise in mortgage rates has caused the profitability of their investments to drop significantly when they remortgage.

These economic factors deter many new landlords from entering the rental market and can cause existing landlords to sell up.

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Tenants Remaining in Rentals for Longer Periods

As rental costs have climbed, so too have the upfront costs associated with moving house, including deposit, agent fees and removal fees.

This financial hurdle, coupled with the scarcity of available rental properties, has resulted in tenants remaining in their current rental agreements for longer periods. Many tenants cannot afford the upfront costs associated with moving, and with fewer available properties on the market, the chances of finding a suitable and affordable rental seem slim.

This trend has a knock-on effect on the wider rental market. When tenants remain in their rentals for extended periods, those properties cannot become available for new tenants. This then creates a gridlock and further diminishes the supply of available rentals.

Lack of Incentives for Landlords to Join the Rental Industry

Becoming a landlord is often seen as a lucrative investment, but over the years, changes to government policy and tighter regulations have eroded some of the appeal and profitability of being a landlord.

The reduction in the amount of tax relief available to landlords with buy-to-let mortgages and the introduction of a stamp duty surcharge on additional properties further increased the financial burden on landlords and made the prospect of investing in the rental market less attractive.

In addition, several more stringent regulations have been implemented, adding further complexity and responsibility for landlords. Whilst these more stringent regulations should be seen as a positive because they aim to improve the standard of rental properties for tenants, they can deter new landlords and even prompt existing ones to leave the rental market.

The Shift Towards Short-term Lets and Airbnb

The increasingly challenging rental landscape has caused some landlords to adapt their strategies.

One notable trend that has emerged is the shift away from traditional long-term lets towards more flexible short-term lets and Airbnb listings. Short-term lets can offer higher returns for property owners, while Airbnb rentals can be particularly lucrative for landlords with properties in tourist hotspots.

This shift may help some landlords to maximise their profits, but it further reduces the stock of properties available for long-term rental, contributing to the UK’s rental property shortage.

The Covid-19 Pandemic Has Affected the Rental Market

The Covid-19 pandemic left its mark on all sectors of the global economy, and the UK rental market is no exception.

During the pandemic, many landlords found themselves in challenging financial situations, with some tenants unable to pay their rent due to job losses. The mounting pressure caused many landlords to exit the market during this time.

The pandemic also impacted the construction sector. Stringent lockdown measures, workforce reductions, and a shortage of materials led to a slowdown in building new homes, further aggravating the shortfall of housing supply.

Impending Changes to Landlord Regulations

Over recent years, there have been a lot of changes to regulations in the private rental sector. Many of these changes have created a more challenging environment for landlords. And it seems there are still more regulatory shifts to come, which could further influence the state of the rental market.

One new change is the Renters Reform Bill, introduced on the 17th of May, 2023. As of writing, this reform was introduced just yesterday, so we haven’t seen the effects of it yet. The bill aims to provide tenants with ‘safer, fairer, and higher quality homes’. One of the most notable changes introduced by the bill is the scrapping of ‘no-fault’ evictions. The reform will ensure greater tenant security but could make property management more challenging for landlords.

Further to this, significant changes to the Minimum Energy Efficiency Standards (MEES) have also been proposed. According to the government document Improving the Energy Performance of Privately Rented Homes in England and Wales, from 2025, the MEES for residential properties will be raised from a minimum EPC rating of E to a minimum rating of C for all new tenancies. This will be extended to all continuing tenancies from 2028 onwards. These changes will mean many landlords face a difficult decision, invest heavily to upgrade their properties or sell.

While these regulatory changes aim to improve tenant rights and promote sustainability, they also increase the demands on landlords.

What Does the Shortage of Rental Properties Mean for Landlords and Tenants?

The shortage of rental properties in the UK brings implications for both landlords and tenants.

For renters, the situation looks particularly challenging. The diminished choice and rising costs have created a difficult market for those seeking a rental home. According to an article in the Guardian, average monthly rent outside of London is higher than ever, with renters now paying more than £1,000 a month. This represents a marked increase from pre-pandemic levels, with renters now paying 25% more. However, high rental prices haven’t deterred competition; they’ve intensified it, with bidding wars becoming common as renters vie for their ideal homes.

The effect on landlords, on the other hand, is mixed. There’s no denying the challenges that have driven many landlords to leave the market. Rising costs, surging interest rates, and tightening regulations have made being a landlord more complex and financially demanding than in previous years.

However, for landlords that have stuck it out and weathered the storm, there are also potential benefits to the current climate of the rental market. The high demand for rental properties and less competition from other landlords can work in their favour. The scarcity of available properties may allow for longer tenancies, higher rental prices, and fewer void periods.

Potential Solutions to the Rental Property Shortage

The current rental market is challenging for both tenants and landlords. Unless measures are taken to alleviate the shortage of rental properties in the UK, the problem may only intensify, with potential knock-on effects for the broader housing market and the UK economy.

However, solving the UK’s rental property shortage is no small task. One fundamental solution is to increase the supply of housing. There also needs to be a concerted effort to encourage more individuals to enter the private rental sector as landlords. Creating a more attractive environment for landlords could increase the pool of rental properties, helping to stabilise and potentially reduce rental prices over time.

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