Rent increases in Britain are projected to exceed wage growth. This comes after UK rents have already increased at an unprecedented rate following the Covid pandemic and as the cost of living continues to rise.
The Resolution Foundation predicts that households will face additional financial strain, with average rents potentially surging by 13% over the next three years. This is due to the continuation of strong growth in the private rental sector which is expected to affect ongoing tenancies.
The foundation estimates that rents will grow by 4.2% annually up to 2027, far outstripping the Office for Budget Responsibility’s forecast of 7.5% cumulative wage growth for average workers (equivalent to 2.4% per year) during the same timeframe.
Last month, Prime Minister Rishi Sunak’s government scaled back plans to increase protection for tenants from no-fault evictions. This drew criticism that Sunak and Housing Secretary Michael Gove succumbed to pressure from Conservative MPs defending landlords.
In its report titled “Through the Roof,” the Resolution Foundation states there has been an extraordinary rise in new tenancy rents – nearly 20% in two years. A dramatic growth in private renting has meant this impacts more households than before, nearly doubling since the mid-1990s to 20% of all households; this includes a noticeable rise in rented family homes with heads aged 30-49, indicating a broadening demographic beyond just those in their 20s.
Though the record increase in rental prices is starting to decelerate since rebounding from the pandemic, with annual growth rates decreasing from 10.4% in June 2023 to 7.5% by March 2024, it could still take years to fully affect the entire private rental sector.
While new tenants are already facing higher costs, existing ones at the end of their tenancy, or those experiencing price hikes within their current lease, will likely confront significant rent increases in the future.
The primary cause of the increased rental costs has been the recovery from Covid lockdowns, when evictions were paused, rents dropped, and the economy was uncertain. More recently, rapidly rising wages have also driven up rents for new leases.
Although there have been fears about landlords exiting the market due to higher interest rates and stricter regulations, the think tank believes these concerns are overblown and points to Bank of England research that shows the sector only contracted by 1% since mid-2019.
Over time, rents tend to follow wage trends, but they dipped to a record low compared to earnings due to pandemic disruptions. Recovering since early 2022, rents are still roughly 5% below pre-pandemic levels, suggesting a continued 13% increase over the next three years to realign with the long-term rent-to-earnings trend.
Cara Pacitti, a senior economist at the Resolution Foundation, emphasizes that the increasing prevalence and duration of private renting make rent spikes a larger issue for Britain, requiring bold action from policy makers. She suggests short-term measures like adjusting local housing allowances for poorer families and a long-term solution of building more homes.
A government spokesperson claimed they are helping households with bill payments during the cost of living crisis and highlighted the Renters (Reform) Bill, designed to increase tenant security and address poor practices. They also mentioned an investment of £11.5 billion in the affordable homes program, with a goal to construct one million new homes within this Parliament’s term.
