At first glance, the UK rental market seems to favour landlords strongly.

Demand is outstripping supply and competition, leading some tenants to offer well over market rate.

Yet with rising interest rates translating to higher mortgage payments, many landlords are looking to sell up and avoid the growing risk of tenant arrears caused by the cost-of-living crisis.

Right now, which group is better off? It’s trickier than it may seem… 

The decreasing number of rental properties in the UK is putting pressure on tenants across the country.

In cities like London, already notorious for a savagely competitive rental market, the number of available properties has decreased by as much as 50 per cent.  

At the same time, tenants have seen their rents increase by an average of 17 per cent.

With no alternative to unaffordable properties, many renters are falling into arrears.

A survey of 2,000 adults in the UK found that 49 per cent are worried they won’t be able to pay their rent in 2023. Given that Londoners, for example, already spend an average of 40 per cent of their income on rent alone, it’s hardly surprising.  

While landlords are in an inherently more privileged position, the picture is not rosy for them.

Rising interest rates have pushed up the cost of mortgages — both on rental properties and their own homes — leaving them with higher bills that many cannot afford to absorb.  

If tenants fall into arrears due to higher rent, most landlords would struggle to pay multiple mortgages from their own pockets.

As such, growing numbers are considering selling their properties and investing the funds elsewhere to minimise risk.  

Why rental properties are important

Landlords have become the target of renters’ vitriol of late, but responsible private landlords are an essential component of our economy.

Even though owning a property outright is the ultimate goal for 80 per cent of people, renting is the best (or perhaps only) option for everyone from students to digital nomads to those with adverse credit.  

Private landlords are essential to ensure the supply of rental homes can keep up with rising demand, particularly as the number of council homes has fallen 11 per cent since 2010.

Property has long been viewed as a savvy long-term investment prospect, drawing many people to the buy-to-let market. 

Learn more: The best areas for buy-to-let in the UK

Lots of landlords see their property as a vehicle to save for retirement, which can be less risky than stocks and shares and better able to keep pace with inflation than stagnant savings accounts — while providing housing that’s genuinely needed.

While this seems like a privilege, it may be the only source of a retirements funds a person has, making their position a little more precarious if they defaulted on the mortgage.  

The challenge for landlords 

The typical image of an ultra-wealthy property tycoon isn’t representative of the average landlord.

While some landlords are privileged, others come from more humble backgrounds.

They may be renting out their home while providing live-in care to a family member or chose to rent out a family member’s home following their death.

Many landlords also purchased when prices were far lower and may not be able to make the same investments today. 

Landlords aren’t automatically wealthy enough to brush off rent arrears or absorb interest rate hikes.

Most landlords are not institutional investors with millions in the bank.

The government’s 2021 English Private Landlord Survey found that 43 per cent of landlords own just one rental property, with 39 per cent owning between two and four. Just 18 per cent of landlords own more than five properties.  

However, lots of people invest in property using a buy-to-let mortgage, with the sole intention of renting it out.

Their tenants’ rent generally only covers the cost of the mortgage.

Recent interest rate hikes have added hundreds of pounds to their monthly repayments, leaving landlords no choice but to pass on the increase or sell.  

Another challenge for landlords is that some tenants will neglect their properties and fail to pay rent by choice, rather than because of genuine hardship.

Repossessing the property can take up to nine months and they could get it back in a terrible state, leaving landlords with a huge bill for rent arrears and an extensive property refurbishment.  

Are UK landlords selling their properties?

The number of buy-to-let mortgages remains on an upward trend, with the number of annual approvals doubling to 211,000 between 2012 and 2022.

However, numbers dipped significantly during the pandemic to 179,000 — perhaps as cautious investors paused their plans or landlords were forced to sell due to financial pressures.  

Though it’s not yet reflected in the figures, anecdotal evidence suggests many landlords are looking to sell their properties.

One Suffolk-based landlord, who found some of her tenants stopped paying rent during the Covid pandemic, explained to the Financial Times: 

“In the next six to 12 months, [being a landlord is] only going to get riskier as people are going to be really stretched about what they can afford to pay in terms of energy and food costs. After that, if we’re lucky, they might be able to pay their rent.” 

However, other landlords are looking to capitalise on high levels of demand and expand or start their property portfolios.

Handelsbanken found that 49 per cent of professional landlords (those with four or more properties) are looking to buy more properties over the next year.

One investor explained he feels the investment potential over the next 20 years is more important than short-term turbulence. Those who have the funds to ride out arrears stand to gain a lot by investing now.  

What’s squeezing the UK rental market?

Over the last six months, many renters will have received the unwelcome message that their rent will soon increase.

In most cases, the rise will simply cover the landlord’s increased mortgage repayments. Yet some unscrupulous landlords are taking advantage of incredibly high demand.  

One young renter in London was hit by a proposed 27 per cent rise, amounting to an extra £4,000 in rent over the course of six months.

Even though landlords are supposed to only raise rents fairly, generally in line with inflation, high demand means wealthy renters are lining up to pay way over market value to secure good properties.  

At the other end of the spectrum, 80 per cent of young people say they would rather buy than rent but huge numbers are trapped in the rental market by skyrocketing mortgage rates and energy bills.

To put it into perspective, an average buyer (based on the UK’s current average property price of £296,000) could be paying £600 more per month now than in December 2020.

A property that once felt affordable now feels out of reach — particularly alongside an 81 per cent rise in the average household energy bills.  

The verdict 

Ultimately, tenants seem to be coming off worse right now.

Even if landlords end up with tenants in arrears and ultimately have to sell their property due to rising mortgage payments, it’s extremely unlikely they’ll lose their own home.

Legal hassle and losing an investment may be frustrating and financially devastating, but that doesn’t come close to the situation for some renters.  

For tenants, the stakes are so much higher.

Many people are stuck in unaffordable or substandard housing that is, in the worst cases, damaging their health.

Lots are being forced out of their childhood neighbourhoods and away from their jobs simply because of high rents.

A small portion are even facing homelessness and debt collectors as their bills spiral out of control.  

If you’re interested in investing in property, find an adviser with Unbiased.