The third time Dhunya De Silva tried to move to London, she hoped it would be different. After she and her boyfriend had been promoted at work, she thought they might be able to afford to rent in the capital.

The 23-year-old had previously tried to move from Hertfordshire, just north of the city, first when she started university in London and again after graduating. Both times, the high cost and unappealing homes on offer led her to stay put.

Even with the extra income from her promotion, the third search has become an ordeal. With dozens of other tenants competing for every listing, the pressure is intense to be first to view a flat and fight it out in a bidding war.

“It is absolutely insane. Every morning I type in ‘rent in north London’ or ‘rent in east London’ and I look at every property. Last week, it got to the point that I was refreshing it every 15 minutes,” says De Silva. “It is pretty mind-blowing. It can’t keep going on as it is now.”

Or can it?

Rising interest rates have slammed the brakes on the runaway market for UK home sales. In contrast, the rental market is still red hot. Newly let properties are 25 per cent more expensive than before the Covid-19 pandemic hit in 2020, according to estate agents Hamptons, and still rising at 9 per cent in May compared with the year before.

UK annual rent increases set a new record for 12 consecutive months up to April this year, according to Office for National Statistics data going back to 2016. While the pace of annual rental growth seems to be slowing, tenants will continue to struggle as already unaffordable rents keep rising.

There is now growing concern that the supply of rental homes could get even worse as higher mortgage costs hit landlords and make buy-to-let investments less attractive — or, in some cases, economically unviable.

In the past few weeks, many of the UK’s largest lenders, including HSBC, Nationwide and Santander, have raised their mortgage rates, adding to pressure on landlords.

“This is the worst supply and demand balance we have ever seen, and it’s only going to get worse,” says Guy Gittins, chief executive of Foxtons. In April, the agency had 97,000 tenants chasing after just 2,000 available properties. “Rents will continue to rise ahead of incomes unless we see a sustained increase in rental supply or a material weakening in demand, both of which appear unlikely,” says Richard Donnell, executive director at Zoopla. The number of available rental properties listed on the site is currently 33 per cent lower than before the pandemic — and it has flatlined, with homes getting snapped up as quickly as they come on.

The situation for renters is already dire. There are about 5.5mn private rental homes in the UK. More than a third of these households spend half their take-home pay on rent, which is considered “severely rent burdened”, according to a survey of 11,000 people by Spareroom, the flat-sharing platform. Evictions due to rent arrears reached the highest on records going back to 2009 in the first three months of the year, according to Generation Rent analysis of government data, while “no fault” evictions jumped to the highest since 2017.

Agents and analysts blame the strained state of the market on a severe lack of rental properties to meet ever-growing demand.

“We went from an all-time high in levels of stock [during Covid] to the lowest levels I have seen in the best part of 30 years,” says Lucinda Richardson, head of lettings at Winkworth in Notting Hill.

In part, the lack of homes to rent is a symptom of the UK’s overall housing shortage. The supply of new homes peaked at 242,700 in 2020, still short of the government target of 300,000. House building has fallen since then, and big developers predict a further drop in construction of up to 30 per cent this year as higher borrowing costs limit demand from homebuyers.

A shortage of social and affordable housing has pushed more people into the private rental market, with more than 1mn households on waiting lists for a social home in England. The state of the market has prompted calls for immediate action. London mayor Sadiq Khan has joined other city leaders in calling for a cap on rent rises, which has been temporarily imposed in Scotland.

A key issue for the rental market has been an onslaught of challenges facing private landlords. Unlike many European countries, where large institutional landlords are more common, small private landlords provide the bulk of UK rental homes. “It is a sector that is dominated by the mum-and-pop investors . . . For many landlords, the cost of debt and its tax deductibility is going to be the biggest issue,” says Lucian Cook, head of residential research at Savills.

The market is now feeling the effects of measures, phased in between 2017 and 2020, that have increased many landlords’ tax bills by removing the ability to deduct mortgage interest and instead providing a tax credit.

“When it was first introduced, the effect was deferred or hidden because you had a very low interest rate environment,” Cook says.

The ability to weather the shock of higher mortgage costs will vary, depending on how many properties landlords own and how much they have borrowed. Just under half of rental properties have a mortgage against them, according to Savills analysis.

The tax changes, which came alongside an increase in the stamp duty payable on rental properties, have meant some landlords are already not able to turn a profit. A typical landlord refinancing a 2.2 per cent two-year fixed-rate mortgage this year at a new rate of 6 per cent would need to raise the rent 31 per cent to cover the additional cost, Hamptons says.

“We have had three landlords in the past week who have to sell because they can’t afford their mortgage,” says Hollie Hart, a south London agent.

The steady income from a rental property looked appealing during the era of ultra-low interest rates. Now, investors have more options. “You can put money into Treasury bills at 4 per cent with no risk of the boiler going wrong or your tenants not paying rent on time,” says Jo Eccles, managing director of agency Eccord, which also manages rental properties for landlords.

The demographics of UK landlords could also drive an increase in the number who are quitting the market, as those who bought properties in the early days of buy-to-let look to realise their investments. Some 140,000 landlords retired last year, according to Hamptons, which says shifting demographics will see an increase in landlord sales in the next five years.

“There is a sort of natural life cycle to that buy-to-let market,” says Sandra Jones, managing director at research consultancy Dataloft. “There was probably always going to be a generation of landlords who wanted to realise their assets at this point, and Covid concentrated that.”

So far, the string of bad news for landlords has meant too few new properties coming on to the rental market. The popularity of buy-to-let mortgages prompted the number of privately rented homes to double from 2002 to 2015, according to Zoopla. But since then, the number has remained largely flat as tenant demand has increased.

Net migration in the UK reached a record high in 2022, at 606,000 people, most of whom will look for a rental home, according to Capital Economics, which says the surge in migration may have increased rents by 3 to 7 per cent.

At the same time, Jones and some other analysts argue that affordability will eventually act as a natural brake on rent rises, as tenants are forced to choose smaller homes or move to other locations. “There must be a slowing of the rental market because it is always tied to affordability. There is no new money,” says Dominic Agace, chief executive of Winkworth.

For renters, that will come as cold comfort. “I have lived in New York before. I lived in London for many years. This was the worst move I have ever done by far,” says Sarah, who returned to London last year after five years in Australia to be closer to her two adult children, who are studying in the UK.

The 51-year-old psychologist, who asked the Financial Times not to use her real name, found herself back in the rental market after a divorce. She recently had to move out of her apartment in west London because the landlord decided to sell, but wanted a two-bedroom flat in a similar area so that one of her children could live with her.

“I am not actually sure how young people can afford to live unless they have wealthy parents. It’s awful,” she says. She says the high rents and lack of properties were compounded by moving costs, which included £700 for cleaning and £500 for removers who increased the fee midway through the job. “People are really taking the piss, I have to say,” Sarah says.

One of the few bright spots for tenants is the renters reform bill introduced by levelling up and housing secretary Michael Gove with the aim of adapting UK rules for a market where more households will rent for longer and fewer people will own homes. The law would end “no fault” evictions, meaning landlords could only get rid of tenants for a reason, such as unpaid rent or if they want to live in the property themselves.

The bill has been welcomed by tenant advocates and by many property companies, including Grainger, the UK’s largest listed landlord. Critics of the bill say it will add another reason for prospective landlords to not rent out their properties.

Cook says the move will benefit current tenants who have a rental home that suits their needs for the next several years, who will have more security and “a stronger position at rent review”.

But for those looking to rent their first home, or who need to move, the new rules could leave them with even less choice. The rental market has already become more static as tenants are afraid to move and want to hold on to good deals they secured during Covid.

The reaction to the rental reform points to the political trap posed by the rental market. Pro-landlord measures favour relatively wealthy people who can afford an investment property but steps that increase the burden on landlords are criticised for tending to reduce the rental supply and ratchet up pressure on tenants. Cook says the key risk is that the reform bill could “entrench issues of lack of supply. That is the political dilemma in a nutshell.”

The law is one of several new hurdles on the horizon for landlords, which have fuelled anxiety that the UK is on the brink of a major sell-off by buy-to-let landlords.

More homeowners will see their monthly costs shoot up when their fixed-rate mortgages end, exposing them to higher rates. The government has also said it aims to push landlords to increase the energy efficiency of their properties to an Energy Performance Certificate C grade by 2030. The details of new rules have not been fixed but upgrading a property could mean thousands of pounds in extra costs.

With private landlords in retreat, newly built rental homes backed by large institutional money managers are often cited as a source of new supply. These so-called “build to rent” schemes are increasingly popular with large property investors thanks to their steady income, but currently only provide 82,500 homes, with another 168,000 planned or under construction, according to Savills.

Rising financing costs and planning constraints will make it difficult for these developments to keep up with demand. “We don’t believe it is possible to build enough new units in the places where people want to live in the next five or six years,” says Gittins.

With the lack of rental supply becoming a chronic problem, there is little relief in sight for tenants who feel stuck because high rents make saving for a deposit difficult. Donnell says steep rent rises will probably continue through this year and possibly into 2024 unless there is a major rise in joblessness, a fall in immigration levels or an increase in the supply of rental homes.

Clarissa, a London marketing assistant who declined to give her surname, had to increase her monthly budget of £1,200 by 40 per cent and give up on having any outdoor space to find a flat. But then her prospective housemate decided to move back in with her parents instead of paying the higher rent, leaving her in a last-minute scramble.

“It was a bit of a nightmare. I started to sofa surf between my friends in London. I was living out of a suitcase for a couple weeks,” she says. Ultimately, she moved back into an available room in a house-share where she had lived before the pandemic. The feeling of moving backwards on the property ladder has been frustrating. “I’m still living in shared accommodation. Trying to save is just impossible,” she says.

Joshua Oliver is the FT’s property correspondent

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