Why rental prices are increasing in 2023

March 28, 2023

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Article Summary

Buy-to-let
  • According to the latest report by the Office for National Statistics (ONS), the average monthly rent for a one-bedroom property in the UK has risen to £1,200, up from £1,100 in Q4 of 2022.

  • This rise in rental prices has been driven by a lack of supply of rental properties, which presents an opportunity for investors to enter the market and capitalize on the high demand.

  • The Bank of England is predicted to raise their base rate to 4.25% in the coming months, though this is lower than some anticipated.

Rentals in the UK consistently increased throughout 2022, with this trend continuing into 2023. While these increasing rental prices in the UK may be putting pressure on tenants, they are presenting a positive investment opportunity for those looking to invest in the rental market. According to the latest report by the Office for National Statistics (ONS), the average monthly rent for a one-bedroom property in the UK has risen to £1,200, up from £1,100 in Q4 of 2022.

 

Supply vs Demand

It is clear that there is an imbalance between the number of people searching for rental properties and the number of available properties. There has been a 23% increase in enquiries in the last year, according to Zoopla, and enquiries are 46% higher than normal. However, the stock of rental homes is 4% lower than last November and 38% lower than the 5-year average, showing a shortage of available properties.   

This rise in rental prices has been driven by a lack of supply of rental properties, which presents an opportunity for investors to enter the market and capitalize on the high demand. Additionally, the Covid pandemic has caused many landlords to hesitate in letting their properties, further aggravating the supply shortage and driving up rental prices.

In particular, buy to let opportunities appeal to investors. Buy-to-let is the method of investing in property with the intention of renting it out to tenants, instead of for the investor to live in. These developments often offer high-quality accommodation, with facilities such as gyms, communal areas, and concierge services, which appeal to tenants looking for modern and convenient living.

Moreover, the buy-to-let market has been gaining traction in recent years, with more investors entering the market. Following the pandemic and the rise in popularity of Airbnb and short-term lets in particular, more investors are looking to this as an option when leasing their properties.

The rental market in the UK is likely to remain challenging in the short term, with tenants continuing to face rising costs and a lack of affordable options. However, for investors, the situation presents a unique opportunity to invest in the rental market and potentially benefit from the high demand for rental properties.

 

Cost of Living

Rising rental prices can be seen as a positive sign for investors. In many cases, rental prices will rise in line with the cost of living, meaning that investors can expect to see higher returns on their properties. This is particularly true for investors who have purchased properties in areas where demand for rental housing is high, as they may be able to command even higher rental prices in a competitive market.

In a recent study, Savills found that inflation is still likely to be above the 2.0% target by the end of the year, while the average income remains low. This, along with other financial strains such as increasing fuel costs, has made it more difficult for people to be able to afford buying a home, so many are opting to rent until the economy improves.

This can be seen as a mistake or an opportunity missed as there are available property investment opportunities that may no longer be around in the future. Property investment is a long-term game, and thinking in this short-term mindset will not yield optimum results.

It is expected that the demand for rental properties will remain strong until 2023. According to a report from Aviva, this could be due to the fact that up to one million people may not be able to purchase their first home because of the financial burden caused by the cost of living. In reality, this is a chance for investors to take advantage of the market, grow their portfolios and get a higher ROI with the increased rental prices.

 

High Mortgage Rates

The recent changes in UK mortgage rates have had a considerable effect on the rental market. As a result of the volatile market conditions following last year’s mini-budget, mortgage rates have settled, though at a higher level than in the past. The Bank of England is predicted to raise their base rate to 4.25% in the coming months, though this is lower than some anticipated.

With this sense of volatility, many first-time home buyers are choosing to delay purchasing a home until mortgage rates become more reasonable. While this is a difficult time for those trying to buy a house, this period offers a potential investment opportunity for property investors.

Some experts are predicting price falls of up to 8% this year and demand for rental accommodation forecast to increase further along with rental growth. 2023 could be an opportune time to invest in buy to let property for investors looking for a shrewd property investment opportunity.

Rising mortgage rates can be viewed as a sign of stability in the property market though. When rates are low, this can often lead to a surge in demand for properties, which can create a sense of instability in the market. As rates rise, however, demand may stabilize, leading to a more balanced and sustainable real estate market.

The rising rates can benefit investors who are looking to purchase properties as rental investments. As the cost of borrowing increases, this can put pressure on individuals who are looking to buy homes for their own use. However, for investors, rising mortgage rates can actually potentially lead to higher returns on rental properties due to the higher rental prices.

 

Conclusion

These three main reasons highlight the reasons why rental prices are increasing, but also why investors should not be scared or worried about them. Mortgage rates and cost of living prove to be positives in the investors favour, as the rental prices are driven up and therefore they are making more returns on their investment than they would normally.

They would be reaping the rewards of getting in the market early, before the rest of the crowd and will see the benefit. Property investment is always going to be a long-term game, so people who are scared off by the short-term issues will not benefit from the opportunities presented today.

To learn about the property investment opportunities above, or to find out more about how property investment works, get in touch with the experts at North Property Group today.

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