Demand shock to hit rents in 2020 - Capital Economics
UK Housing

Demand shock to hit rents in 2020

UK Housing Market Update
Written by Hansen Lu

The economic hit from the coronavirus will cool rental demand, while social distancing measures will tip market dynamics in favour of renters. We have downgraded our forecast for rents and now expect them to fall by 1% this year. But rents should recover quickly once coronavirus restrictions are eased.

  • The economic hit from the coronavirus will cool rental demand, while social distancing measures will tip market dynamics in favour of renters. We have downgraded our forecast for rents and now expect them to fall by 1% this year. But rents should recover quickly once coronavirus restrictions are eased.
  • Until recently, the outlook for UK rental growth was strong. But the coronavirus has dramatically changed that. High frequency indicators already show parts of the economy closing. (See Chart 1.) We expect rising unemployment and lost income will sharply reduce rental demand in the coming months.
  • Government support will only partly dampen the blow. Our best estimate is that around 700,000 people will lose their jobs, pushing the unemployment rate to 6%. (See UK Economics Update.) Furthermore, many who keep their jobs will see reduced household income, as hours worked are reduced. With employment among lower paid workers to be the most affected, and renting more prevalent in lower paid households, renters will see a disproportionately large impact.
  • Admittedly, the buy-to-let sell-off was also set to continue this year. But with transactions grinding to a halt, that activity will now pause. Still, that won’t do much to rebalance rental market pressures. After all, the data from last year show that landlord sales were already slowing. Coronavirus restrictions will also prevent new landlords from investing in rental market holdings.
  • Moreover, market dynamics have, for now, shifted in favour of renters. When renegotiating rents, the eviction ban has reduced landlords’ bargaining power. That is due to last only three months, but we suspect it may be extended in some form later this year. Also, with house viewings now prohibited, landlords will struggle to find new tenants if their current ones leave – raising the risk of an extended void period.
  • Admittedly, existing tenants will also struggle to find new homes to rent. But many young adults, who had previously been driving the pick-up in tenant demand, may instead opt to temporarily move in with their parents. Such behaviour is supported by social distancing measures, which have reduced the attractiveness of staying in inner-city locations. The closing down of university campuses will also push many young adults back home from their current private rented accommodation.
  • Beyond that, anecdotal evidence suggests that some international migrants are leaving the UK in response to travel bans. And, with at least some travel restrictions on travel likely to stay in place for a while, net international migration is likely to drop sharply this year, which will also hit rental demand.
  • In all, our expectations for rental growth in 2020 have weakened substantially. But, given strong fiscal measures by the government, we expect the impact on rents to be modest. We now expect rents to fall by 1% across 2020 as a whole. (See Chart 2.) But, as restrictions are eased and the economy starts to recover, the hit to the rental market should be fairly short-lived.

Chart 1: UK Number of People Dining Out (% y/y)

Chart 2: UK Private Rents Forecast (% y/y)

Source: Opentable

Sources: ONS, Capital Economics


Hansen Lu, Property Economist, 020 7808 4988, hansen.lu@capitaleconomics.com