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Renting: the harsh law of supply and demand

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In the private rented sector, the harsh laws of supply and demand are pitting tenants against landlords, explained the money pages of the Daily Mail on the 30th of August.

The antagonism between landlord and tenant is coming to a head through the very simple effects of the law of supply and demand – the supply of rental accommodation is drying up, the demand for rental accommodation continues to soar, and the inevitable result is an increase in rents that many tenants simply cannot afford.

Let’s take a closer look at the factors in this simple yet cruel equation.

Supply

Compared with times only recently gone by, today’s landlord is under considerable financial pressure to turn a profit from any by to let business.

After a painful few years while it was being phased out, the tax relief previously enjoyed by landlords on their monthly mortgage interest payments finally came to an end in April 2020.

In its place, landlords now qualify for tax credits based on 20% of their mortgage interest payments. These are far less generous than the previous system of tax relief and – as explained in a report by Which? magazine in April 2022 - will actually disadvantage some landlords.

There are now 168 separate pieces of legislation regulating the private rented sector and the chief executive of the National Residential Landlords Association (NRLA) has said that the sector is “overrun by rules and regulations”.

Many landlords seem to agree and, according to a report by Landlord Zone on the 15th of July 2022, such a “war on landlords” will effectively reduce the number of properties available to rent by some 46,000 this year alone – the equivalent of 3,800 let properties every month.

Demand

While many landlords are selling up and reducing the reservoir of available properties to let, there is no let-up in the number of tenants wanting to rent.

The number of landlords withdrawing from the buy to let market is staggering. According to a story in the media outlet Bloomberg on the 24th of August 2022, the number of homes available for rent fell by 49% from March 2019 to March 2022 – the pool of available rental accommodation was halved in just 3 years.

For that reason, argued the Guardian newspaper on the 14th of February 2022, the UK will require a total of 227,000 new rental homes each year in order to meet the demand from an expected 1.8 million new households created during the forthcoming decade.

The result is that even now queues form outside flats that are advertised for rent in London. A story in My London on the 28th of August 2022 recounted that hopeful tenants had lined up 15-deep to view a single flat.

Desperate times call for desperate measures as prospective tenants also entered into bidding wars with landlords about the rent they are prepared to pay, with some offering to put down a whole year’s rent simply to secure a tenancy.

Rents

In the meantime, the inevitable consequence of the imbalance between supply and demand is an increase in the rents that landlords charge – for those landlords prepared to continue their buy to let business, of course, operating costs and the general effects of inflation also affect them.

On the face of it, average rent increases across the country seem to be reasonably modest. Figures released by the Office for National Statistics (ONS) on the 17th of August 2022 revealed that the national average increase in rents in the year to the end of July was 3.2% - up slightly from the 3% recorded in the 12 months to the end of June.

As ever, statistical averages can be deceptive – especially if you are unfortunate enough to be looking for rented accommodation in certain hotspots.

In its edition of the 17th of August 2022, the housing magazine Big Issue noted that the median monthly cost of rent in England and Wales had reached £795 – its highest ever and a rate of growth that is climbing faster than at any time in the last 16 years.

The Big Issue notes that conditions are probably the worst in London, where the median rent has now reached £1,450 a month – some £500 steeper than any other part of the UK. In the capital, rents have soared by an average of 19% since their pre-pandemic levels.

Outside London, the national average rent currently sought by landlords is £1,126 a month – 3.5% higher than the levels recorded in the previous quarter of the year and nearly 12% higher than in June of 2020.

Conclusion

When the balance between supply and demand is so seriously out of kilter, the effects on rents can be substantial. The antagonism this generates between landlord and tenant is only likely to improve when the availability of rental accommodation in the private sector begins to match the demand.