Is supply or demand driving residential rents in the UK?

Residential rents in the UK have grown by between 8% and 9% every year since 2020[1]. This is the strongest streak recorded in credible data.

We believe this growth is likely to ease through 2024, but we still anticipate rents to grow 5% over the course of the year. This is still notably higher than both pre-pandemic levels and the all-property average.

Drivers of growing rents set to ease?

The late Berkshire Hathaway vice chairman Charlie Munger once quipped: "Long ago, kings would hire people to read sheep guts. Listening to today's forecasters is just as crazy."

In that spirit, there's most likely some humble pie waiting for anyone who thinks they can accurately predict performance to the decimal point. But we believe that forecasts are nevertheless useful in articulating risks, performance drivers and the scope of potential outcomes.

In our view, many of the key drivers of residential rental growth are likely to ease during 2024, although we think they will remain more elevated than their pre-pandemic levels. These levers include wage growth, the barriers to homeownership and population change (particularly deriving from immigration).

Nominal wages are expected to grow by 4.2% in 2024 (down from 7.5% in 2023)[2]. A combination of significant declines in real house prices and falling mortgage rates could improve for-sale housing affordability, allowing some existing renters to move to home ownership.

Finally, immigration flows are expected to normalise as the spikes seen during recent geopolitical events subside and the UK government enacts stricter immigration laws. This could reduce some of the outsized rental demand the UK saw through 2022-23, given that most new immigrants typically enter the rental market.

Is low housebuilding still driving rents?

The level of housebuilding has fallen in the UK. The number of new homes built in 2023 was 9% lower than in 2022[3]. The number of new starts was also 8% below 2022[4] levels, suggesting an increase in housing completions is unlikely to be forthcoming in the short term. We think it follows logically that this should be supportive for stronger rental growth.

Historical evidence, however, suggests the impact of changes in supply to rental growth is modest – with demand drivers having a relatively big impact.

Across all the credible time series of rental growth available, we find that changes to supply offer a very partial explanation of rental growth. Demand drivers, like population change and wage growth seem to fit the data better.

The RICS residential market survey, an agents’ housing market sentiment measure, has typically been one of the more useful leading indicators for future rental growth, and more so than their views on changing supply levels.

Demand over supply

Ultimately, we believe that supply must influence the pace of rental growth in a market environment to a degree, as is the case with traditional established sectors. But in the UK residential rental context, we think the lower impact shown in the data is largely a result of the market already being very undersupplied for the periods measured. With supply being low for an extended period, the effect of a slower increase in supply on rental growth in the future is less significant.

While supply growth may weaken in 2024, the existing evidence suggests that its ability to drive stronger rental growth is limited anyway. Demand looks set to remain in the driving seat.

[1] ONS, Countrywide, Homelet Rental Indices as at Jan 2024

[2] PMA as at Dec 2023

[3] DLUHC, Live Tables on Energy Performance of Building Certificates as at Jan 2024

[4] DLUHC, Live Table 213 as at Jan 2024