Post-pandemic return of workers to city centres triggers severe property crunch

A supply black hole looms as the London rental market crisis intensifies, writes Melissa Lawford

The pandemic set London’s rental market on a rollercoaster ride. First, an exodus of tenants sent demand plummeting. Prices nosedived. Then, the easing of restrictions brought office workers, students and corporate relocators back all at once, forcing tenants into desperate bidding wars. Rents soared.

But the problem is only going to get worse. Now, the London rental market is hurtling towards a third phase of the pandemic fallout: a supply black hole.

The Greater London Authority forecasts the population to rise by 700,000 by 2031 and JLL property consultants reckon this means the capital needs another 300,000 rental properties in the next eight years. But a tax crackdown and high mortgage rates are driving landlords out of the market and housebuilding cannot keep pace. At the same time, higher housing costs mean tenants are renting for longer, and households are shrinking, meaning tenants are using homes less efficiently.

Overall, by 2031, JLL estimates London will have a shortfall of 110,500 rental homes. “In reality, this could be far higher, given the headwinds to home ownership and the challenges for small landlords limiting supply levels,” warns Emma Rosser, of JLL.

Rental demand in February was 44pc higher than the five-year average, while supply was down by 41pc, says Zoopla. The rents achieved on new lets in London rose by 14pc in 2022, according to referencing service Homelet. But this is not enough to encourage large-scale investment.

Landlords know that there is demand but many are unable to step in to fill the supply gap, says Rosser. UK Finance, the lender body, expects a 27pc year-on-year drop in the value of buy-to-let lending across 2023. “Mortgage rates and high taxes mean this year their profits are really eradicated,” says Rosser.

Tax changes from April 2020 mean that landlords who own properties in their own names are no longer able to offset all of their mortgage interest costs against their tax bills. This magnifies the blow of higher rates – even if their properties become loss-making, they still have to pay the same amount of income tax.

“Total rental supply is likely to fall as mortgage-financed landlords find the cost of their mortgage payments rise close to, if not above, their rental income when they refinance at higher rates,” says Andrew Wishart, of Capital Economics, a research consultancy.

Initially, during lockdown, renters left London in droves. But later they returned in droves. This created a bottleneck, says Tim Bannister, of Rightmove. In the first phases of the return to the capital, the use of the rental housing supply became less efficient as tenants leased properties with extra bedrooms. Tenants who secured deals in this initial return phase, before prices began to soar, signed long leases because they knew they had good deals.

As prices rose, more tenants also renewed old leases, opting not to move in a rising market, says Bannister.

In 2021-22, the average private renter had been living in their current home for 4.4 years, according to the English Housing Survey. This was the longest period of time since at least 2010 and a jump from 3.5 in 2013-14. This means there is less “churn” – another factor that reduces the supply of properties being listed to rent.

Every time people’s housing needs change, more tenants need to move house. The pandemic shift to home working brought a surge in people needing to move. “I don’t think we’re completely settled in terms of hybrid working. That is a structural change that is still working its way through the rental market,” says Bannister.

But now tenants have a new reason to reassess their living arrangements – the cost of living crisis, he says. “Now, people want smaller, more affordable properties. That is a significant change,” says Bannister.

Rising costs create a spiral of pressures for rental demand. “The lack of housing and particularly of homes at the right price, means people are delaying their life milestones,” says Rosser. Renters are increasingly likely to be childless. Data from the survey show that from 2014-15, the number of renting households with no children rose by 17.8pc to 3.2m. This meant the share of renters who did not have families rose from 62.6pc to 68.4pc.

Based on current trends, the average household size will fall from 2.5 to 2.3 between now and 2031, says Rosser. This means the rental demand needs more properties even just to cater for the same number of people.

But the number of people is growing – and population growth in the capital flows disproportionately into demand for rental properties.

Between 2011 and 2021, London’s population grew by 9pc, but the number of households grew by 19pc. Data from the survey show that the number of renting households rose by 33pc. This is partly because population growth is typically driven by young professionals who are more likely to move into the rental sector than buy their own homes. High house prices, which have jumped by 83pc since 2011, compared to a 24pc increase in average gross pay, means Londoners are also increasingly being shut out of the housing ladder. This pressure will be made worse by the end of the Help to Buy scheme this month, says Rosser.