The demand for rental properties has skyrocketed amid the mortgage crisis, with many first-time buyers deferring their entry into the property market until market stability returns.

While the UK is still reeling from the outcomes of the since rescinded mini-budget in September, many have been significantly impacted with homeowners at the forefront, but a cohort that can be considered as one of the ‘victims’ of this mortgage crisis has been first-time buyers. As a result, younger generations are now deciding to rent rather than buy with the purpose of obtaining a better mortgage rate deal in the future.

Finbri, a bridging loan broker specialising in short-term property finance, explains, “Demand for rental properties is increasing as a result of the UK economy and mortgage market volatility. First-time buyers are deferring entry into the market due to the market’s protracted uncertainty and their overall weakened position. Lenders are having a harder time approving mortgages, and sellers are walking away because of delays, therefore it’s to be expected that sales will fall and the rental market will continue to grow.

“We recently surveyed over 1,000 property investors who despite the mortgage uncertainty currently, remain optimistic about future investments. We discovered 50.45% of investors plan to invest in 2023. More experienced investors with over 5 properties are even more determined with 67.92% looking to further invest next year. What this shows us is there are investors looking to capitalise on the increased demand for rental property.”

Rental demand on the rise – investors on alert

Projections suggest that with the base rate increase, many potential buyers will have no choice other than enter the rental market to avoid high-interest rates. The typical rent has increased to an average of £1,162 outside of London, a rise of 3% over the last 3 months alone. In London the increase is even more staggering. In Greater London, the average rent is currently £2,343 a month, up 11.3%, with Inner London rants up 26.1% year-on-year.

According to Propertymark, an average of 13 prospective tenants are lining up for every rental out there. Tenant demand is up 20% year on year, but the available rental properties are down 9%, according to data from Rightmove.

What do investors need to consider if they’re looking to capitalise on the increased demand for rental property?

Capital appreciation – Property prices are expected to decline by at least 5% in 2023, and with many homeowners finding it difficult to get a mortgage and the number of foreclosures rising, the rise in the number of properties available on the market will present an excellent opportunity for investors to diversify their real estate holdings.

Inflation – The current rate of inflation is 10.1% and is predicted to peak at 11% by the end of this year, and is expected to remain high into 2023. Contributing considerably to the cost-of-living crisis affecting the majority of the UK, as a result landlords are having to increase monthly rent to keep up with rising costs. However, this is causing some landlords to sell up with some tenants unable to pay the higher rents.

Cost-of-living crisis – Fewer people can afford to buy homes as household budgets tighten; with a rise in food, fuel and housing costs. This is putting further pressure on household budgets whilst making it harder to save. This is having a notable impact on demand in the rental market, with many having to reduce savings to deal with the unprecedented inflation rates.

Many people are also compelled to downsize in order to reduce their expenses. Already, there is 71% more competition for studio apartments than there was a year ago.

Mortgage rates – In November, the Bank of England announced a 0.75% increase in its base rate, from 2.25% to 3%. The Bank of England also reports that the number of mortgage approvals has reached its lowest point in four years. As a result, there will typically be less opportunity for buyers , which will drive down prices and is likely to lead to further interest in rental properties.

Shortage of supply – With around 168 rules and regulations controlling the private rental sector and its management, as well as minimum energy efficiency standards, and the effect of Section 24, has led to a number of landlords to exit the market swiftly reducing the number of rental properties available.

However, due to the lack of housing and reluctance to borrow at high rates has led to 20% more looking to rent. Although this continues to have a negative impact on those looking to purchase their first home, it provides the optimal opportunity for property investors to enter the private rental market, especially the more experienced investors with wider portfolios.

Is now the time to invest in the private rental market?

This is the prime opportunity for property investors to enter the market, with an influx of demand due to priced-out first-time buyers coupled with the housing shortage – if investors are able to fund purchases, they  can buy property at a cheaper price.

Rental price increase – Asking rates in the private rental market have increased by around 3% excluding London, with no evidence to suggest a decrease in the near future. Whereas those in London have experienced a much sharper increase of around 16% within the last year. The mainstream rental value in the UK is set to increase by 6.5% in 2023.

House values declining – Whilst some locations will see house prices change differently to others, house values are expected to continue declining in 2023 by around 10%, according to Savills housing report. This could provide a robust opportunity for investors, as homeowners may look to sell up and downsize to smaller properties with smaller monthly mortgage costs.

Final thoughts

The anticipated market conditions offer investors a significant opportunity to profit from the current market conditions and expand their portfolio, particularly with the number of those entering the property market expected to continue rising. Despite the state of the economy, there is significantly growing interest in the private rental market and as people look to downsize in the search for smaller mortgages, there’s likely to be more property for investors to choose from.