Activity in the housing market generally remains suppressed, but the behaviour of the rental sector is evidence that underlying occupier demand is still robust.

Generation Rent

Demand for housing in the UK has shifted towards renting, particularly amongst the so-called ‘rentysomethings’. The payment of rent, rather than mortgage interest, is now the focus for many younger households unable to raise the capital needed for a mortgage down payment.

Supply and demand

Since the credit crunch, the laws of supply and demand have driven rental growth despite a weak economic recovery. Low levels of residential investment activity mean the supply of rental accommodation has not kept pace with rising demand, particularly in employment hotspots.

On the supply side, the high capital values set by owner-occupiers have kept yields low, deterring income-seeking investors. Low levels of housing development, and a focus on building for more mature owner-occupier households, have reduced flows of new lettable stock.

On the demand side, there is a long term growth trend in the numbers and concentration of 20 - 34 year olds living in major cities, while the inaccessibility of mortgage finance means the number of those trapped in renting has increased sharply over the past five years.

Political and business will is now undoubtedly focused on boosting organised and large-scale investment in residential property, but it will take time for targeted build-to-let schemes to make a significant difference to stock levels.

Meanwhile, the activity of private individuals – the biggest landlord group in the western world – is restricted by a lack of debt funding, leaving the sector reliant on equity-rich individuals and, ultimately, income-seeking organisations to provide stock. Against this context, a slow recovery in mortgage lending will only serve to increase demand.

Rents and incomes

The demand/supply imbalance has inevitably pushed up rents. The key question now is the extent to which rent rises can continue without stretching affordability to breaking point (see 'Growth in asking rents' in the gallery).

Rental growth decreases a tenant’s ability to save for a deposit, locking them in renting for longer. We therefore also expect increasing tenant demand in the young family sector as well as among young singles and childless couples.

Ultimately, for all these groups, affordability will act as a cap on rental growth. Our forecasts assume that average growth will be limited by disposable household income growth.

This will create clear distinctions between markets where there are high concentrations of tenants reliant on housing benefit and those that are supply-constrained, where affluent tenants increasingly compete for lettings.