As the UK rental market wraps up 2023, emerging trends and data suggest significant shifts on the horizon for 2024. With rental prices nearing their peak affordability and a noticeable decline in demand, the rental landscape is poised for notable changes.

Key Trends and Forecasts

Rising Rents: Over the past year, average rents for new lets have increased by 9.7%. This surge, however, is predicted to slow down, with a more modest increase of around 5% expected in 2024.

Demand Dynamics: Rental demand has seen an 11% decrease compared to last year but still stands a third higher than the five-year average.

Analysing the Market Shift

The private rental sector has been characterised by a severe mismatch between supply and demand over the past three years, culminating in a 33% increase in rents for new lets. However, as we transition into 2024, a significant slowdown in rental growth is anticipated. This change is attributed to the following factors:

• Worsening Affordability: As rents reach their peak affordability, demand is expected to moderate.
• Improved Supply: A slight increase in the availability of rental homes is projected, which should help balance the market.

Decelerating Rental Growth

The most notable deceleration in rental growth is evident in London, where the rate has halved from +17.0% to +9.0%. Other regions, however, are maintaining steadier growth rates, buoyed by continued affordability in comparison to average earnings.

Driving Forces Behind Rental Demand

Several factors have fuelled strong rental demand in recent years:

• Post-Pandemic Reopening: The lifting of pandemic restrictions in mid-2021 revived the economy and international travel.
• Employment Market Strength: Robust employment growth bolstered demand.
• High Mortgage Rates: Increased mortgage costs made home ownership less attainable.
• Immigration Levels: Record levels of immigration, especially high numbers of overseas students, contributed significantly.
• However, these influences show signs of plateauing, as indicated by a steady slowdown in rental enquiries in the latter half of 2023.

Changing Market Dynamics

Pandemic Effect: The initial surge in demand following the pandemic is wearing off.

Employment and Income Trends: There is a noticeable slowdown in employment growth, coupled with early signs of slower income growth.

Mortgage Rate Adjustments: Slight reductions in mortgage rates are making home ownership increasingly appealing compared to renting.

Rental Supply and Demand Equilibrium

Despite the recent changes, rental demand remains 32% above the five-year average. The market is unlikely to reach a balance between supply and demand soon, but signs point towards a more balanced state than seen in the past three years.

Projections for 2024

General Outlook: The rental market is set to continue cooling in 2024, primarily due to affordability constraints. In areas where affordability still exists, rents could rise by between +5% and +8%, outpacing anticipated earnings growth.

Conclusion

As 2024 approaches, the UK rental market is entering a period of recalibration, driven by shifting demand dynamics and evolving affordability challenges. Understanding these trends is crucial for renters, landlords, and investors to navigate the market effectively.