Renting vs buying in London: rents set to rise twice as fast as house prices by 2026

 (Daniel Lynch)
(Daniel Lynch)

London rents could rise more than twice as fast as house prices between the end of 2022 and the end of 2026, as the capital’s property market is forecast to recover faster than any other region, while the pressures in the rental market show no sign of abating.

London house price growth is expected to outperform all other regions of the UK for the first time since 2015, with five per cent annual growth in Q4 2025 and 11.6 per cent growth over the four years to 2026, according to new research from Hamptons.

The capital is also expected to experience smaller-than-average house price falls in the last quarter of this year at -2.5 per cent. This is because growth in the capital has been lower than elsewhere over the past five years, so there is “less froth to come off” its prices.

The forecasters predict that in 2025, lower mortgage rates (expected to average out around 4.75 per cent for a two-year fix) will cause a bounce back in the capital first because a higher share of homeowners have a mortgage and tend to borrow more-than-average multiples of their income.

That said, the report flags that political risks – such as the general election at the end of 2024 – could weigh on activity in prime central London.

But rents in the capital will remain the highest in the country, with a total increase of 25 per cent expected in the same period.

Both the relatively lower house price growth and soaring rental growth can be attributed to the new mortgage landscape, with buyers’ budgets currently reduced as a result of interest rate rises.

Meanwhile a significant proportion of London’s rental market is made up of larger portfolio landlords who are dependent on some form of finance, for example a buy to let mortgage. “London is also the lowest yielding region in the country on average and so landlords here have less ability to absorb higher costs,” Hamptons said.

House prices v rent in the UK

Across Britain, rents could rise by 25 per cent over the four-year period, compared with 5.5 per cent growth in house prices.

Southern regions, where affordability is most stretched and higher mortgage rates have hit harder, are set to see bigger price falls by the end of 2023. These regions include the South West (-4.0%) and East of England (-3.5%) and South East (-3.0%). Property prices will start going up in the South at the end of 2024, with London experiencing a modest 1.5% increase.

“On paper, the house price falls we forecast are minor in nominal terms. But high inflation for other goods and services means that in real terms, the average price of a home will have fallen around 11 per cent between 2022 and 2024. This essentially reflects “the correction” caused by higher rates. It’s also why we expect prices to rise again in both real and nominal terms from 2025 as rates fall to their new normal and a new housing cycle begins,” said Aneisha Beveridge, head of research at Hamptons.

As mortgage rates gradually fall and households benefit from real income growth, Hamptons said it expects house price falls to come to a halt in 2024, with growth picking up in 2025 – which is thought likely by the property services firm to be the year when a new housing market cycle starts.

It expects just under a million house sales to take place across Britain in 2023, which would be down on 1.2 million completions last year.

Slightly lower mortgage rates and improved affordability in 2024 will encourage 1.1 million completions next year, it predicts.

This will be more akin to the 'u-shaped' downturn of the early 1990s than the 'v-shaped' crash and subsequent speedy recovery in 2008

Aneisha Beveridge, Hamptons

Meanwhile, a build-up of long-term supply issues combined with rising landlord costs will continue to put pressure on rents, Hamptons suggested.

A combination of lower rental yields and more landlords being reliant on finance will put added pressure on investor profits on London in particular, it added.

In the North East of England, Hamptons is expecting relatively strong house price growth of 8.5 per cent by the end of 2026, while in Wales, house price growth is predicted to stall overall, at 0 per cent.

Researchers explained that house price growth in Wales has already been relatively strong in recent years, while in the North East, there has been less price growth compared with some other regions. Housing affordability in the North East is also less stretched compared with some other regions, allowing some capacity for further house price rises.

Hamptons used Office for National Statistics (ONS) and Bank of England data for its forecasts.

Hamptons forecasts for house price growth between the end of 2022 and the end of 2026:

– London, 11.5%

– East of England, 9.0%

South East, 9.5%

– South West, 5.5%

– East Midlands, 5.0%

– West Midlands, 4.0%

– North West, 1.5%

– Yorkshire and the Humber, 1.5%

– North East, 8.5%

– Wales, 0.0%

– Scotland, 3.0%