Rising rental yields – a snapshot of the market in 2023

The approach of the halfway point in the calendar year provides an opportunity to take the temperature of the UK rental market in 2023.

Flick through any credible analysis and you’ll find a key trend: rising rental yields. But is this trend likely to continue? You might think a crystal ball is needed at this point. 

However, it’s possible to make informed predictions if we look at the causes of those rent increases and understand whether they are in the ascendency – or becoming less influential factors.

High demand; limited supply 

Going back to the beginning of the year, it’s clear that rents were increasing as 2023 was getting underway. The Office for National Statistics (ONS) produced its Index of Private Housing Rental Prices in February, highlighting a steady increase in private housing rental prices in the UK. According to the data, the average private rental price in February 2023 rose by 4.7% in the previous 12 months.

This increase could be attributed to a combination of factors, including strong demand, a shortage of rental properties, and rising costs for landlords. The report revealed regional variations, with the East Midlands experiencing the largest annual rental price percentage change among English regions, at 4.9% in the 12 months leading up to February 2023. 

This region consistently demonstrated the fastest annual rental price growth throughout 2022 and the early part of 2023. On the other hand, the West Midlands had the lowest annual rental price percentage change in the same period, but it still reached a notable 4.0%. It is worth noting that this marks the highest annual percentage change observed since the initiation of the West Midlands series in January 2006.

The following month, Zoopla produced its regular Rental Market Report, providing further insight into the unfolding picture of the UK rental market in 2023. It said the residential rental market had been “running hot for two years”, with a “perpetual boom” in residential rents which continues to run well ahead of earnings growth.

Zoopla found there was an 11.1%rise in rents for newly let properties in the year up to March 2023, albeit down slightly from the 12.3% peak seen in mid-2022.

Reopening of the economy – key factors in rising rents

There was a significant increase in demand for rental homes and rental inflation from mid-2021 onwards, Zoopla said. 

The reopening of the economy and new visa rules attracting students and workers were major factors driving this surge in demand. Rental inquiries per estate agency branch reached double the five-year average in summer 2022, while demand per available rental home rose by 250% above the average due to a shortage of rental properties. 

Currently, demand for rented homes remains 10% higher than the previous year, indicating a sustained level of demand.

Despite the increased demand, the supply of privately rented homes has remained relatively static. The number of private rented homes in the UK was slightly higher in 2021 than in 2016, following a period of significant growth between 2002 and 2015 driven by landlords using buy-to-let mortgages. 

However, ongoing portfolio adjustments and landlords exiting the market have offset new investments in rental properties.

But what of the future?

In late April, The Big Issue said renters are likely to face continued rent increases as a result of a “lack of action to address the supply issue in the rental market”. 

Additionally, rising mortgage rates could have a knock-on effect on tenants, the magazine said. Landlords may pass on higher mortgage payments by raising rents, creating additional financial pressure for renters. 

Moreover, there is expected to be increased competition for rental homes as aspiring first-time buyers struggle to afford homeownership.

In a nutshell – the UK rental market in mid-2023

To summarise, the UK rental market in 2023 has been characterised by rising rental prices, driven by factors such as high demand, limited supply, and increasing costs for landlords.