(Bloomberg) -- New tenants in Britain are spending almost a third of their income on rent, and analysts warn there is little relief in sight as landlords exit the market in record numbers ahead of reforms planned by the new Labour government.
Rents consumed 30% of tenants’ gross income last month, up from an average of around a quarter between 2019 and 2023, according to the Office for National Statistics. That’s money that could otherwise be spent on goods and services, making it harder for Prime Minister Keir Starmer’s administration to grow the economy.
Labour’s revamp of the lettings market could make things worse for tenants, who already face some of the highest rental costs among developed nations, experts say.
New proposals, from banning evictions without cause to tightening green requirements, are aimed at improving protections for tenants, many of whom are being forced to rent because they cannot afford a home of their own. But the policies are raising costs for landlords and many are selling up. That’s shrinking the number of properties available to rent, keeping upward pressure on prices.
“You’ve got a piece of legislation that is designed to benefit tenants, but actually one of the unintended consequences is it actually ends up hurting tenants,” said Tom Bill, head of UK residential research at Knight Frank. “It’s economics 101 — you reduce supply, you’re going to see rental values increase.”
Average private rents are still rising at a near-record pace, increasing 8.4% in the year to September, even as inflation for everything from food to clothes is starting to come down. Estate agents expect rents to keep rising as supply is not keeping up with demand, according to the Royal Institution of Chartered Surveyors.
It helps explain why rising real incomes and a first interest-rate cut from the Bank of England are failing to lift consumers, whose spending drives the British economy. Spiraling housing costs are adding to the pressures facing millions of tenants at a time when they are braced for potential pain in the budget on Wednesday. Rents accounted for half of the 1.7% increase in consumer prices over the past year.
“Continued increases in broader living costs, including household rents, do definitely contribute to consumer sentiment and cautiousness,” said Tera Allas, director of research and economics at McKinsey UK & Ireland.
While rising costs are driving up rents, cheaper borrowing is easing cost-of-living constraints for homebuyers. BOE figures published Tuesday showed the housing market gaining momentum, with the number of mortgage approvals edging up to 65,647 in September. That’s the highest level since August 2022, just before Liz Truss’s disastrous mini budget plunged the mortgage market into turmoil. Economists had expected a modest dip in approvals.
The rental affordability data for September is based on those starting new tenancies. Separate ONS figures covering all private renters show an average household in England could expect to spend 34% of their income on a median-priced home in the 2022-23 fiscal year.
Rents in several London districts were above 40% of income — a popularly used threshold to assess those with . However, affordability has deteriorated fastest in the North West since 2014-15, with tenants in Manchester losing almost 46% of their earnings to housing costs — the second-highest ratio of any local authority after Kensington and Chelsea.
Rents are also expensive by international standards. OECD figures show 21% of tenants in the private rental market spends more than 40% of their disposable income — double the share in France and Italy. Only the Netherlands, New Zealand, Chile, Finland and Norway have a bigger proportion of over-burdened renters.
A proposed ban on evicting tenants in England without a reason and limits on in-tenancy rent rises are among the key measures included in Labour’s Renters’ Rights Bill unveiled in September. Landlords are also concerned about needing new insulation, windows and heating systems to meet new energy performance certificate requirements by 2030.
“Our member agents tell us of growing uncertainty amongst landlords at a time where many are already struggling to break even on the costs of letting their properties,” said Nathan Emerson, CEO of Propertymark.
That’s leading many to exit the market. Around a fifth of homes currently for sale were previously available to rent, the highest proportion on record and a jump from around 14% over the past five years, according to September data from property website Rightmovre.
Starmer hopes to fix the housing crisis by building 300,000 homes a year on average during the current parliamentary term — a feat no government has achieved since Labour under Harold Wilson in 1969-70. The risk is that too many people remain stuck in expensive rented homes, undermining his ambition to make Britain the fastest-growing Group of Seven economy.
“Because rents are at the top of households’ priorities when deciding what to spend money on, they are ‘true essentials,”’ Allas said. “There are few, if any, alternatives for households in the short term, whereas for many other items they can either temporarily stop spending money or trade down.”
--With assistance from Tom Rees.
(Adds BOE mortgage approvals data in ninth paragraph)
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