Rent will rise faster than wages for years, think tank warns: 'Nowhere to hide from housing crisis'

Rent rises may be slowing but there’s bad news ahead for renters, with tenants still facing monthly payments to outstrip increasing wages over the next three years, the Resolution Foundation has warned.

Rents have hit record highs for new tenancies in recent years and have risen by 18% in the last two years as part of a post-pandemic ‘correction’, according to the think tank’s research.

New tenancy surges are beginning to slow but will still filter into average rents over the next three years which could see payments rise by 13% over the next three years.

That’s higher than the 7.5% increase in average earnings the Office for Budget Responsibility has forecast over the same period, meaning more pain for renters who have been feeling the effects of the cost of living crisis in recent times.

“Millions of families agreeing new tenancies across Britain have faced surging rents in recent years, as we have emerged from the pandemic. Those rises for new tenancies are starting to slow, but how much renters actually pay will continue to outgrow how much they earn for some years to come as those not yet exposed to higher prices are hit,” said Cara Pacitti, senior economist at the Resolution Foundation and author of the Through the roof: Recent trends in rental price growth report.

“With more families renting privately, and renting for longer too, these rent surges are a bigger problem for Britain, and require bolder solutions from policy makers. Short-term solutions include regular uprating of local housing allowance to support poorer families, and the ultimate longer-term solution is to simply build more homes.”

Rents tend to follow wages as a long-term trend and average rents have remained around the same proportion of average earnings since 2000.

But disruption to the rental market during the pandemic saw rent levels fall to their lowest point on record relative to earnings. After evictions and repossessions were halted during Covid, rents were nearly 5% lower than long-term trends suggested.

Since then, the post-pandemic catch-up and historically high earnings growth has heated up the market with incomes up 13% since the beginning of 2022.

That catch-up is now complete, according to Pacitti, which has seen annual growth on new tenancies fall from 10.4% in June 2023, to 7.5% by March 2024.

But now existing tenants reaching the end of a tenancy or forced to accept within-tenancy price rises will face future large rent hikes of more than 13% over the next three years.

That is likely to continue to impact family living standards. The number of families privately renting has almost doubled in a generation – from 11% in the late 1990s to nearly 20% today.

That shift has seen renters become older too. The proportion of poorer families headed by someone aged 30-49 that are renting has almost tripled from just 11% in the mid-1990s to nearly 30% in 2021-22.

Ben Twomey, chief executive of Generation Rent, said: “Renters have nowhere to hide from the housing crisis. It doesn’t matter what you’re earning: if your landlord thinks someone else would pay a higher rent, then they can demand more from you, and threaten you with eviction if you push back.

“Rising rents mean we have less to put aside for the future, and less to spend on actually living. As well as building more homes and giving enough support through the benefit system, the government needs to stop landlords raising rent beyond what we as tenants can actually afford.”

Pacitti also said popular arguments for rising rents are wide of the mark.

The theory that rising interest rates have seen landlords pass on mortgage costs to tents ignores the fact that the wider rental market limits their ability to pass hike rents.

If that wasn’t the case, landlords would likely have chosen to unilaterally increase rents before 2022, the economist argued.

Pacitti also found limited evidence of a landlord exodus from the private rented sector due to interest rate rises and tougher regulation, despite warnings from MPs discussing the Renters Reform Bill in parliament.

The Resolution Foundation’s analysis of Bank of England research found a very modest shrinking of the sector since mid-2019, equivalent to just 1% of the homes available for rent.

Ben Beadle, chief executive of the National Residential Landlords Association, said: “Rising rents are a result of a range of factors. Whilst wage growth plays a role, a key driver is the imbalance between supply and demand.

“As the report highlights, an increasing number of people at all stages of their life now rely on the private rented sector. However, with demand far outstripping available supply, there are an average of 15 prospective tenants chasing every rented property, double the pre-pandemic level.

“The impact of rising interest rates and tax increases should not be downplayed. 82% of buy-to-let loans are interest only and the number of buy-to-let mortgages in arrears more than doubled in the final quarter of 2023 compared to the year before. The Institute for Fiscal Studies has said that: “the more harshly that landlords are taxed, the higher rents will be”.

“Ultimately, a healthy rental market is one in which there is a supply of rented housing to meet ever growing demand. Ministers need to act to support the sector by developing pro-growth tax measures to deliver this.”

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