British renters will be hit with 25% price hikes over the next 4 years as landlords pass on spiraling interest rate costs, broker predicts

As landlords cope with the impact of persistent interest rate hikes on mortgages, as well as new regulations, rents are set to sky-rocket by 25% in the next four years, says London-based real estate group Hamptons International predicts. 

“There’s a strong argument that the Bank of England’s quest to quell inflation has hit the rental sector harder than any other part of the housing market,” Aneisha Beveridge, head of research at Hamptons, said in a statement. “A build-up of long-term supply issues combined with soaring landlord costs is putting upward pressure on rents. And it’s hard to see any of these pressures receding any time soon, which is why we expect rents to continue rising over the next few years.”

U.K. rents have been on a relentless increase—July’s rent rose the highest on record, according to government data. London has been leading the trend, and Hamptons expects that to continue for the next few years as landlords in the city are more likely to lean on some form of costly financing. 

The British capital is also one of the country’s lowest-yielding regions on average which means that in order to protect these low yields landlords would likely pass on high mortgage costs to their tenants by hiking rentals. 

The pangs of soaring rentals add to the litany of challenges facing Brits amid a cost-of-living crisis touching nearly every aspect of life from food to fuel. Inflation was 6.8% in July—well above the 2% target set by the Bank of England, which has lifted interest rates 13 consecutive times since last year. The central bank said last month that borrowing costs are likely to remain elevated in an effort to bring inflation under control.    

Promise of the housing market

Even if the picture looks bleak on the rental front, it isn’t all bad news for the U.K.’s housing market. While rent is set to continue ticking up, some estimates suggest housing sale prices could fall by 5% in 2023. Hamptons sees housing prices declining by 7.4% by the end of this year, when adjusted for inflation, and dropping annually until 2025. 

The demand for new home purchases have fallen as a result of high mortgage rates—so, while house prices have plummeted since their 2020 peak, financing costs are much higher. 

House prices have notably fallen in London—in June, prices dropped 0.6% compared to a year earlier, making it the only region in the U.K. recording a decrease. 

For the first time in 13 years, rents are cheaper than monthly mortgage payments, according to real estate platform Zoopla, which helps explain why fewer people are climbing the housing ladder now. 

“More flexible working, demographic trends from an ageing population, a strong labour market and high immigration will all keep encouraging people to move house—although to a lesser degree than if mortgage rates were more affordable,” Zoopla’s senior editor Ellie Isaac wrote in a blogpost a few weeks ago. 

While price drops will be moderate, Hamptons sees inflation amplifying the effect of it. But a supply crunch will continue to put pressure on house prices in the current market.  

“High inflation for other goods and services means that in real terms, the average price of a home will have fallen around 11% between 2022 and 2024,” Beveridge said. “This essentially reflects ‘the correction’ caused by higher rates.”