Annual rental prices rose 5 per cent in May, the highest rate for seven years, putting UK renters under further financial strain as the cost of living crisis deepens, new data showed.

Rent rises were most acute in London where they grew 5.1 per cent, according to the Office for National Statistics on Wednesday, with soaring mortgage costs darkening the property market outlook.

Higher mortgage costs are already weighing heavily on millions of homeowners, making it more difficult for prospective buyers to purchase a property and pushing rental demand higher.

“Rising mortgage rates will exacerbate the situation this year, and upwards pressure on rents is unlikely to relent any time soon,” said Tom Bill, head of UK residential research at estate agency Knight Frank.

Markets are pricing in further increases ahead of an expected Bank of England interest rate rise on Thursday, its 13th consecutive increase as it struggles to tame stubbornly high UK inflation.

On Wednesday, data from the ONS showed that inflation remained unchanged at 8.7 per cent, disappointing expectations of a decline.

Meanwhile, mortgage rates have risen to about 6 per cent, near to where they stood in 2007.

The ONS also reported that the average UK house price dropped to £286,000 in April, £7,000 below its September 2022 peak.

“Were mortgage rates to be sustained at that level for several years, a 25 per cent drop in house prices would be likely,” said Andrew Wishart, economist at Capital Economics.

He added that the impact of higher mortgage rates would be worst for the estimated 1.4mn households reaching the end of their fixed-rate deals this year — their increase in payments would be similar to those incurred by borrowers in the late 1980s.

“The future for the property market feels very uncertain” said Jamie Elvin, director at Brighton-based Strive Mortgages. “I fear for the property market, and a house price crash seems inevitable at this point.”

Rents rises have also been driven by a lack of housing stock, compounded by tax changes that have hit landlords and leading some to withdraw from the property rental market, experts warn.

The latest survey by the Royal Institution of Chartered Surveyors reported an increase in the number of buy-to-let landlords looking to sell their properties and a decline in interest from overseas buy-to-let investors.

Julian Jessop, Economics Fellow at the Institute of Economic Affairs think-tank said the government should avoid introducing mortgage subsidies or price controls.

But, he added, it had “a role in tax and regulatory reform, including fixing our broken planning system, to ease constraints on the supply side and to boost the economy’s productive potential”.

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