Richard Rowntree, Managing Director for Mortgages, discusses the real reasons rents are rising, including how tenant demand continues to significantly outstrip available stock.

Concerns that increasing mortgage rates are having the greatest negative impact on pressured household finances have attracted growing political attention in recent weeks.

The Chancellor spearheaded the introduction of the Mortgage Charter for the owner-occupied residential market, prompting Shadow Chancellor Rachel Reeves to argue that the measures should extend to buy-to-let mortgages.

There are concerns expressed by the Labour shadow team that landlords remortgaging at higher rates is driving rental inflation, but the reality is far more nuanced than that and embedded in old-fashioned supply-demand dynamics.

Zoopla data highlights the shift in the dynamic between available inventory and tenant demand became most apparent halfway through 2021, a time when the economy started to open back up after the long Covid lockdown.

Tenant demand significantly outstripped available stock, a situation that has remained to this day. It was at this same point, late summer 2021, that we started to see the ONS rental inflation data head upwards.    

Noting that interest rates were still sub-2% around this time undermines the notion that it is the passing on of mortgage costs that are driving up rents. As does the fact that ONS figures point to rent inflation averaging around 5%, which is far surpassed by other inflation metrics.

Remortgaging at higher rates will, of course, be a contributory factor to the rental inflation story, but it certainly isn’t the main driver.

There are just over two million buy-to-let mortgages outstanding and approximately 5.5 million properties in the UK PRS, meaning that around two-thirds of properties are unencumbered and not subject to inflationary mortgage pressures.

Additionally, around 200,000 buy-to-let mortgages are due to come off their fixed rate this year if all those mortgages written five, three and two years ago are still live, which represents just 3.6% of that 5.5 million total.

It is too easy to target landlords as the source of rental inflation without truly addressing the true cause, which is a lack of new homes coming into the sector at a time when demand will only increase.

Another important factor that appears to be absent from the debate is housing benefit that is failing to keep pace with rents.

A study by the Institute of Fiscal Studies noted how freezing of local housing allowance (LHA) rates in cash terms resulted in the proportion of private rental properties that were completely covered by housing benefits falling from 23% before the pandemic to just 5% today.

This change can be seen against a backdrop of a steady decline in the proportion of social and affordable rented property from 20% in 2001 to 16.4% in 2022.

This is important because it shows that at the heart of what is being used as a political football, is the ongoing issue of too few affordable homes.

Despite the challenges of a volatile economy, we know that landlords, particularly the professional contingent who have been in the sector long enough to have weathered previous storms, recognise the need for the PRS to pick up the slack and this means demand for the service they provide remains.

As a sector, it’s up to us to find innovative ways to facilitate investment to meet this demand.  

This article was first published in Mortgage Solutions.