The number of homes available to rent has fallen for the first time in three years, putting renewed upward pressure on rents across the UK.
Rental supply is now 3% lower than a year ago, according to Zoopla’s latest Rental Market Report. The decline accelerated in August, when the number of available properties was 6% below last year’s level.
At the same time, tenant demand is strengthening. Enquiries have risen to 5.3 per rental listing, their highest level for almost two years.
Zoopla says higher mortgage rates are keeping would-be first-time buyers in rented accommodation for longer. Meanwhile, subdued landlord investment is limiting the flow of replacement rental stock.
The resulting squeeze has pushed annual UK rental growth to 2.6% in July, up from 1.6% in February. The average rent now stands at £1,340 per month.
Zoopla expects the pace of growth to accelerate further. It forecasts annual rent rises of 4% to 5% by the end of 2026.
Supply recovery goes into reverse
The number of homes available to rent began falling in May. That brought an end to a three-year recovery in supply which had helped slow rental inflation.
Zoopla’s analysis shows rents are generally increasing fastest in areas where rental supply has fallen most sharply.
Yorkshire and the Humber has recorded a 12% fall in available rental homes. London has seen a 6% decline.
By contrast, rental supply in Wales has increased by 7%. The country has subsequently recorded the sharpest slowdown in rental growth.
Zoopla argues that these regional differences suggest the acceleration in rents cannot simply be attributed to the Renters’ Rights Act in England. It points to similar trends in Scotland, where rental supply is also falling and rents are rising.
London rental market tightens
London is experiencing pressure from both sides of the market, with supply falling as demand increases.
Annual rental growth in the capital has accelerated to 2.9%, compared with 1.7% a year ago.
Zoopla says higher mortgage rates are having a particularly significant effect on prospective London buyers.
Its analysis suggests the average London buyer now needs an additional £35,500 deposit to offset higher mortgage rates introduced this year. Nationally, the equivalent figure is £18,200.
That is keeping some prospective buyers in rented accommodation for longer.
The squeeze is particularly pronounced across inner London. Rental demand there is higher than last year, while available stock has fallen 13%.
As a result, rental growth across these areas is running at between 3% and 4%.
Cheapest rental markets record biggest increases
Rent rises are also strongest in some of the UK’s more affordable locations.
Areas where average rents remain below £750 per month have recorded average growth of 5.4%. That is more than double the UK-wide rate of 2.6%.
Dumfries has recorded an 11.3% increase, while rents in Carlisle have risen 8.8%.
Zoopla says many of these markets are experiencing weaker tenant demand than last year. However, falling supply is continuing to push rents upwards.
Richard Donnell, executive director at Zoopla, said: “The rental market is starting to tighten again after three years in which the supply of homes for rent has steadily improved and rental growth slowed easing the pressure on renters. Our latest report shows how sensitive the rental market is to even modest changes in how many homes are available for rent.
“Higher mortgage rates are not just impacting the sales market, they are keeping more would-be first-time buyers in rented homes for longer, reducing available supply just as the seasonal upturn in demand gets into full swing. This is pushing rents higher again, mainly in regions where the availability of homes for rent has declined the most, although affordability remains an important constraint on how far rents can rise.
“The upward pressure on rents is greatest in London, where higher mortgage rates have had the biggest impact on home buyers, and in more affordable rental markets where renters have greater capacity to absorb increases. Low levels of new investment by landlords and renters renting for longer mean we expect UK rents to increase by 4–5 per cent by the end of the year. Growing the number of homes for rent through increased investment is the most sustainable route to boosting choice for renters and ensuring stability in rent levels over the long run.”
Industry reaction
Nathan Emerson, CEO at Propertymark, said: “The latest Zoopla data reinforces the importance of increasing the supply of good-quality homes for rent. As availability falls, competition increases and affordability pressures grow for tenants.
“Higher mortgage costs are also keeping some would-be buyers renting for longer, while landlords continue to face significant borrowing, operating and regulatory costs that can make investment more challenging.
“A sustainable private rented sector requires the right conditions for responsible landlords to invest for the long term. Increasing supply must remain a priority if we are to give tenants greater choice, improve affordability and create a more stable rental market.”
Tom Bill, head of UK residential research at Knight Frank, commented: “Rising mortgage rates are exacerbating the imbalance between low supply and high demand in the lettings market as more tenants stay put. That follows years of tightening supply as landlords left the sector due to a proliferation of red tape and taxes. For those who have stayed, the Renters’ Rights Act has aggravated the situation further, with some landlords setting asking rents higher to compensate for the increased risks they face around void periods, rent collection and regaining possession of their property.”
Greg Tsuman, managing director for lettings at Martyn Gerrard, said: “The fundamental failure in housing policy has been a failure to follow cause and effect. Taxation, regulation, investment, supply and demand are interconnected, but policy too often treats them as separate issues.
“The result is an extraordinary paradox: tenants can be paying unaffordable rents while landlords are receiving inadequate returns. Both can be true at the same time.
“Take a fairly ordinary London example. A £600,000 property with a 75 per cent mortgage and rent of £2,500 a month produces £30,000 a year. After £18,000 of mortgage interest and £3,000 of other costs, the landlord has made £9,000 before tax. Yet because of Section 24, a higher rate taxpayer can face a £7,200 tax bill. That is an effective tax rate of 80 per cent on the actual profit, leaving just £1,800 a year from £30,000 of rent.
“The tenant wonders how the landlord can possibly complain when they are paying £2,500 a month. The landlord wonders why they are taking the risk of owning a £600,000 asset to make £150 a month. That disconnect tells you almost everything that is wrong with the system.
“It is hardly surprising that new investment is drying up. The danger is that the full extent of the contraction is being masked by a weak sales market. Many landlords who want to leave simply cannot currently sell at a price they are prepared to accept. They have not changed their minds. Their exit has been deferred.
“If the sales market recovers, we could therefore see a significant release of that pent up supply and an acceleration of landlords leaving the sector. Nearly one household in five in England depends upon private renting. The Government cannot simply step in and replace that capacity, particularly when its own 1.5 million homes target already looks extraordinarily difficult to achieve.
“Landlords are anticipating yet another tax rise coming in 2027, adding even more fuel to the fire. The real concern is in areas like London, which have already hit their affordability ceiling. If costs can’t be passed on, landlords will inevitably be forced to sell, which is no doubt why the decline in supply in London is twice the national average.
“If there is no adequate return for providing rented housing, investors will eventually stop providing it. Government can dislike that reality, but it cannot regulate away the laws of economics.”
Allison Thompson, chief lettings officer at LRG, added: “These latest figures reflect the strong level of tenant demand we are seeing, but the real interest lies behind the headline figures, specifically regarding the relationship between the sales and rental markets. Higher mortgage costs mean that some tenants are renting for longer than perhaps planned, while a previous dip in landlord investment is limiting replacement stock.
“Yet in London and the South East, falling property prices substantially improve yields. Not surprisingly, we are seeing established investors looking to expand. Clearly serious landlords recognise this unusual set of circumstances as a rare opportunity which they are keen to capitalise on.”
