Rental Inflation Eases Further – But Pressure Remains
Rental inflation in the UK continued to slow in March 2025, with the average annual increase dropping to 4.2%, down from 5.1% in January. This marks a sustained cooling trend from the 8.5% high seen in 2022, suggesting a broader market correction following the post-pandemic surge and cost-of-living shocks.
Key factors behind the continued deceleration include:
Affordability constraints limiting landlords’ ability to push rents higher.
A slight easing of supply-demand imbalance in some regions.
Stable wage growth and lower inflation, reducing pressure for rent hikes.
However, even at 4.2%, rental inflation remains well above the pre-pandemic average of 2–3%, with affordability still a major concern—especially in London and other high-demand urban areas.
Rental Demand Levels Off – But Stays Exceptionally High
While growth in rental demand has plateaued, it remains far above historical levels. The rental demand index now stands at 195 (base year 2022 = 100), down only slightly from its 2024 peak of 200.
Drivers of sustained high demand:
High mortgage rates are discouraging homeownership, keeping many in the rental sector.
More young professionals and families are renting for longer, prioritising flexibility and affordability.
Chronic housing shortages are limiting tenant movement, intensifying competition for available properties.
The slight dip in demand signals that some renters are opting to stay put, consolidate households, or relocate to less expensive areas in search of better value.
Supply Constraints Deepen – Planning Approvals Continue to Fall
The undersupply of rental homes continues to be a critical challenge. Planning approvals for new housing units fell again, with just 36,000 approvals in Q1 2025, down from 38,000 in the same quarter last year, and a significant drop from 50,000 in 2022.
This shrinking pipeline poses long-term risks:
Fewer homes being built now means ongoing shortages in the years ahead.
Build-to-rent projects, while expanding, remain insufficient to replace the loss of private rental stock.
Ongoing landlord exits—driven by higher costs, taxes, and regulation—continue to constrain supply.
Rent Growth Forecasts Continue to Moderate
Market forecasts now predict average UK rents will rise by 3.2% over 2025, slightly down from projections earlier in the year. This follows a trend of falling rent growth expectations: 3.5% in 2024 and 4.0% in 2023.
What’s behind this moderation?
Renters have reached their maximum affordability threshold in many regions.
Some markets are experiencing slightly improved competition due to shifts in demand.
Government and media scrutiny of high rental costs may be applying informal pressure on landlords.
That said, these forecasts remain volatile. If interest rates stay elevated or demand picks up again, upward revisions are likely—especially given the structural supply issues.
Market Outlook: Stable but Structurally Strained
The UK rental market continues to show resilience, but long-standing issues are creating fragility beneath the surface.
Key challenges include:
Persistent high demand with no signs of major retreat.
A shrinking private rental sector as small landlords exit.
An inefficient planning system slowing housing delivery.
Without bold policy moves—such as planning reform, renter protections, and incentives for new rental developments—these pressures will likely persist into 2026 and beyond, keeping rents elevated and competition fierce.
