To truly understand the dynamics of 2023, we must rewind to the tumultuous year of 2020. The onset of the global pandemic sent ripples through the London lettings market, disrupting the conventional patterns of demand and supply that had long governed our understanding of the sector. The uncertainties of that period prompted a significant exodus, as individuals sought green open space refuge outside London. Personal reasons, coupled with economic uncertainties, prompted many to temporarily abandon their London residences and seek a more flexible arrangement.
Students, who had been eagerly looking forward to moving out of halls of residences into the private rental sector, were told to study from home; the student union switched for Mum and Dad’s kitchen and Friday night Monopoly!
Corporate relocations, a vital part of London's Lettings mainstay, were abruptly put on hold until further notice.
However, as the economy gradually reopened, a remarkable pendulum swing occurred. Residents returned to the capital in unprecedented numbers, creating a surge in demand and a noticeable decline in available properties. It was a testament to the resilience of London's allure and the adaptability of its property market.
2022: A Resurgence
By the time we had transitioned into 2022, the lockdowns of 2021/2020 were behind us, and the market experienced a notable correction. Rental prices, following a two-year period of pent-up demand, increased by 15 to 20%. While the headlines heralded this as a sensational surge in rental prices, it was, in reality, an upward recalibration, bringing rental prices back to pre-COVID levels, as many landlords would attest. Tenants who had been insistent on outdoor space during the Covid years again reverted to these requirements being nice to have vs must-have!
2023: The Year of Two Halves
Enter 2023, a year best described as a transitional phase and one of two distinct halves. The initial months echoed the intensity of 2022, characterized by strong and ambitious pricing and multiple bids. However, a pivotal moment emerged as the summer market approached. It became evident that some asking prices had potentially overreached market tolerance, leading to a decline in applicant registrations compared to the previous year.
Amid this recalibration, a subtle yet significant force shaped the landscape—the increasing cost of living for tenants. The Covid economic backlash and the War in Ukraine led to escalating bills, and a rising cost of living began to cast a shadow, impacting the financial flexibility of tenants in meeting the asking prices. This undercurrent became more pronounced as the year unfolded, creating a nuanced challenge in reaching the expected rental rates.
There was another notable change in 2023. Contrary to the extraordinary surge in demand observed in 2022, 2023 saw a return to the typical seasonality of the lettings market—vibrant during the summer but quieter in November and December. The pent-up demand had by now worked its way through the system, with people returning to their usual renting habits. Simultaneously, an increase in available stock numbers was noted. What led to this increase in supply? Property owners, historically hesitant about entering the rental market, found themselves compelled by rising interest rates and increased mortgage costs. Accidental landlords—individuals unable to secure desired sales prices—contributed to the growing stock.
The statistical impact of these shifts became apparent, with some areas witnessing a staggering 50 to 60% increase in stock numbers. In tandem, applicant registrations, as reported by media outlets, experienced a decline of around 20 to 30%. This confluence led to a plateau, even a momentary stalling, in rental prices over the previous few months.
Looking Forward to 2024: Back to the Future?
Gazing into the future, I can’t help but be reminded of 2019. With an election on the horizon, some global uncertainty, and modest economic growth, the trajectory of 2024 hinges on several factors. A potential decrease in interest rates may instil renewed confidence in the sales market, potentially prompting properties to return to the sales market and consequently reducing available rental stock. The primary catalyst for demand in the core market still lies in the ability to borrow money at an affordable rate. Historical evidence indicates that buyers frequently adopt a ‘Warren Buffett-esque’ long-term perspective on their property, the market, and even the broader economy when they are assured that their interest rates and, consequently, mortgage repayments will remain stable and affordable. Thus a return to lower interest rates (perhaps eventually settling around 3/3.5% in the mid to long term) could create a new acceptable normal for buyers. An increase in buyer demand will inevitably lead to fewer accidental landlords and thus less lettings stock.
Given the demographic of renters in London tends to be majority international who initially enjoy the flexibility that lettings offer, I would expect demand to stay relatively stable. That being said, the re-emergence of seasonality as a significant factor in the lettings market should be noted; however, the positive is that it enables landlords the opportunity to strategically plan their property marketing endeavors.
Envisioning a stable first quarter, marked by a reduction in available stock in Q2, the return to seasonality indicates a long-term more measured and predictable market. Our internal forecasts for rental price increases hover around 3 to 5% for 2024, aligning with historical trends. Notably, properties positioned for the summer market may realize increases above the average. However, as 2020 shows us, none of us has the crystal ball!
The Rental Reform Act
A significant focal point in 2023, the Rental Reform Act introduces an element of uncertainty for 2024. While certain aspects remain unknown, the legislation implies a reduction in flexibility for landlords concerning property repossession and rent increases beyond indexed amounts.
In essence, the act solidifies existing common norms for eviction, focusing on what the act deems legitimate reasons such as selling, arrears, or personal/family use. However, it removes a landlord's flexibility for repossession beyond these mandated grounds.
While the legislation imposes certain limitations on rental increases (mainly to be in line with RPI or CPI), it is crucial to acknowledge that the post-COVID surge in rental prices of 15-20% was an anomaly, not reflective of the norms observed over the past decade. Most landlords are content with an RPI or CPI increase in rental on a yearly basis, with few seeking more if they have a satisfactory tenant.
Concluding Thoughts: London is a City of Resilience
As we draw this blog to a close, the overarching sentiment for 2024 is one of cautious optimism. The market, it seems, is poised for stabilization, offering the prospect of gradual growth in rental prices. While uncertainties persist, the property market remains resilient, a testament to London's enduring charm.
Head of Residential
Berkshire Hathaway HomeServices London