Annual price growth continues to slow as rents hit an affordability ceiling

Annual rental price growth slowed to just 1.7% in December, which was less than half the 3.8% increase recorded in December 2015, according to HomeLet’s latest Rental Index.

The average UK rent for a new tenancy starting in December was £892 per month, which although higher than December 2015’s average of £877, is £6 lower when compared to November 2016, according to HomeLet’s latest Rental Index.

Annual rental price inflation has dropped from a high point of 4.5% in March 2016 and the rate of inflation has now been declining or remained stable in each of the past six months.

The reduction in the pace of rental price inflation is most marked in areas of the country where rents were previously increasing fastest.

In Greater London, rents on new tenancies rose by 2% over the year to December to reach an average of £1,508, but this represents a sharp fall from the 7%-plus annual growth recorded 12 months ago.

Rental price inflation is still running ahead of general inflation as measured by the consumer price index, but the slowdown seen during the second half of 2016 suggests that many buy-to-let landlords recognise that tenants have, or are, reaching an affordability ceiling, according to Martin Totty, chief executive of Barbon Insurance Group, HomeLet’s parent company.

He said: “While demand for rental property remains strong, landlords always have to be mindful of tenants’ ability to pay higher prices.

“The data recorded by the HomeLet Rental Index during the second half of last year suggests we have now begun to approach an affordability ceiling, particularly in areas of the country where rental price inflation was previously highest.”

Despite the slowdown, the latest HomeLet Rental Index reveals that rents increased in 11 out of the 12 regions surveyed over the year to the end of December, with the East Midlands the only region to see annual rents fall, down 0.4% year-on-year.

Across the UK as a whole, rent accounted for an average of 28% of tenants’ household income before tax, down slightly on last December’s figure of 28.4%. In London, the equivalent figures are 31% and 31.2%.

Totty continued: “While the industry has speculated that landlords will increase rents to mitigate the impact of factors such as the impending reductions in mortgage interest tax relief, this may prove problematic given the pricing trends we’re currently seeing in the market and the potential for higher inflation and a squeeze on real earnings in 2017.

“The private rented sector is now having to cope with a series of disruptive elements, just at a time of great economic uncertainty, and amid a continuing systematic imbalance between supply and demand for residential property. The assumption that landlords have sufficient means to bear higher costs will soon be tested. Tenants must hope they do.”

He added: “The fact that the areas of the country where rental price inflation was previously highest were the areas in which rent increases dropped back most significantly in the second half of last year adds weight to the idea that an affordability ceiling is now becoming an issue. Landlords and letting agents are clearly being cautious.”

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