Our long-awaited ‘Freedom Day’ has arrived. As of 19 July, all of the restrictions, introduced since the COVID-19 pandemic made an impact across the world back in 2020, were lifted as the UK heads towards a new chapter.
There’s still some way to go, and we are certainly not out of the woods yet, but as the country starts to settle back into some sort of normality, it’s a good time to look at the state of the lettings market, and what projections we might make about the flow of activity in the coming months as we settle into the ‘old normal’.
The changing face of tenant options and aspirations
Tenants in the UK have had to face up to significant challenges over recent years with continual increases to rents impacting on their options to save up a deposit for their chance to get on the ladder. Private rental prices in the UK increased by 10.3% between January 2015 and April 2021, a substantial margin, and they continue to surge, with average UK rents passing £1,000 for the first time last month according to HomeLet.
Rent increases will also put added pressure on tenants saving to buy as house prices across the UK have also surged in recent years – the ONS reported that average house prices increased by 10% year on year to May 2021, representing a continuation of the strong annual growth seen in recent months.
It is also highly likely that supply issues for property – available for both buy and let – will impact both on the options for renters and their ability to make decisions over the coming years. This is already visible in the increasing age at which people buy their first home, with the average age being 34 in 2019, as opposed to 26 in 1997. I can attest to this having bought my first property age 19 and with 3 adult children in their 20s who rent.
However, rising house prices are not the only factor behind tenants sticking to the lettings sector. Many are starting to see renting as a lifestyle choice rather than a steppingstone to home ownership, and in many regards that decision is increasingly generational. One such study predicts that UK tenants could outnumber homeowners by 2039; and the Resolution Foundation think tank estimates that up to one-third of Millennials will never own a home.
The current government looks keen to avoid this, pushing to turn Generation Rent into Generation Buy, but this might not be successful if buying a property is not on the cards for the renters of today and tomorrow. This suggests that the importance of the lettings sector is only going to increase as the years roll on, and that will likely have implications on how the sector is managed as expectations of the younger generation of renters are proving to have evolved quite a bit from what was for long considered the norm.
Where will the next generation of tenants choose to live?
The age when young people leave their parents’ home has been creeping up, with 50% leaving home at 23 in 2017, whereas in 1997 more that 50% of 21-year olds had already left. The data from our recent property survey suggest that many people of varying ages are still living with their parents (including mine); the reasons are many, with the high cost of renting being unaffordable for some, or because living at home makes it easier to save a deposit for a first home purchase. Nonetheless, many of these young adults will soon leave the nest to enter the property market, and many of them will be renting.
Looking at the demographic breakdown, the most populous generation in today’s workplace are Millennials (those born between 1981 and 1996), but Generation Z (roughly born between 1997 and 2012/15) is coming up fast behind them. This generation is in large part still living with their parents and although many will choose early on to save and buy into the property market, many will also choose to stay, taking advantage of the flexibility afforded by renting.
More significantly, both generations are also the first digitally native inhabitants of the United Kingdom, and that means that their interactions with landlords and agents, as well as the services they receive, are set to become considerably more dynamic as new technologies arises that can facilitate and improve the renting experience. Good tenant experiences are vital for ongoing business and sound digital strategies for improving the end-to-end tenancy journey will likely be a keynote of the lettings sector for the foreseeable future.
As we move to a more digitally integrated age, and one where renting is becoming more of a long-term option, the vitality of the sector for newcomers will likely be more balanced than ever before on the flexibility and quality of services provided to tenants. At the end of the day, this is very much the Age of Convenience, and for renting to thrive in the long-term, convenience will be key to getting renters to invest in the sector.
Will landlords remain invested in the market?
If demand for rental properties is expected to increase, the next critical question is whether there will be enough supply. That comes from landlords, who themselves have indeed faced increasingly difficult circumstances over the past few years. Sustained tax adjustments are adding pressure to a group already under pressure, such as the gradual reduction of the tax relief on buy-to-let (BTL) mortgages – with 2021 being the first full year where landlords cannot deduct mortgage expenses from their rental income, and restrictions to Private Residence Relief in effect from April 2020 – which means that landlords who do not share occupancy with their tenants could miss out on up to £40,000 of lettings relief.
Many landlords have also had to face a difficult year of rent arrears building up in the wake of the pandemic, along with eviction challenges – the temporary restrictions on evictions only ended on 31 May and notice periods will not return to pre-COVID levels until 1 October. This is a challenge that may well remain after COVID if the government does decide to strip Section 21 ‘no fault’ evictions from the 1988 Housing Act.
Landlord confidence was already very low in early 2020, with almost one-third planning to reduce their portfolios or exit the industry entirely according to anecdotal sources from across the industry. However, over a year later in 2021, it does seem as though landlord confidence is on the up, with the NRLA Q1 2021 Landlord Confidence Index, published in May, suggesting that the proportion of landlords planning to buy over the next 12 months is now 50% higher than in Q1 2020. With more renters choosing to move out from cities to towns and the countryside, landlords perhaps see an opportunity to expand their portfolios in these areas of increasing demand.
So, although there might be consolidation in the marketplace because of rising costs and changing regulations, landlords who are investing in the marketplace over the next 12 months will likely add fresh stock that could help counterbalance the high demand in the sector.
In closing, rental demand across the UK certainly appears to be accelerating, particularly in cities, and that will make supply all the more important in the months to come. The phasing out of the Stamp Duty holiday will also likely mean that activity in the residential buy market will start to cool off over the coming months and it will be interesting to see how the market reacts as activity settles – low interest rates and a lack of supply will continue to inflate prices further, which might temper demand for the remainder of the year.
However, BTL landlords still might see an opportunity to expand their portfolios, and while it remains to be seen whether activity will move from sales to lettings (that’s a question to dive into another day), if a balance can be struck, the outlook ahead does look increasingly positive.Interested in reading more data insights about the current state of lettings?