London’s Rent Crisis

Sevin Karabulut

London’s rental market has experienced further rises in prices over the past year, due to two main issues: inflation and an increase in demand relative to supply. As a result, many tenants are unable to find affordable homes, leaving them worried and on edge. 

The Office for National Statistics illustrates truly how severe the rental crisis in London is. It reveals that private rental prices in the UK rose by 6.2% from January 2023 to January 2024 (ONS, 2024).  Moreover, it highlights that London had the highest annual percentage change as opposed to other parts of England, such as the Northeast, which saw the lowest at just 4.7% (ONS, 2024).


Figure: Private rental price percentage change (ONS, 2024)

The continued rise in London's rental rate is the result of multitude of factors that increased demand for rental homes. This is illustrated in the diagram as a shift from D to D1 moves the initial equilibrium (E1) output from  P1Q1 to P2Q2 (E2). The law of supply states that as the price of a good increases, suppliers will increase the quantity supplied of goods and services, holding everything else constant. 

 

UK's relaxed immigration policies in the past two decades led to the surge in immigration and this increased the demand for rental homes, especially in London. The supply of new rental homes has not increased as much, and possibly remained relatively constant. As demand pushed up the prices, landlords converted existing housing stock into rental homes. This imbalance between demand and supply has resulted in the housing crisis. Limited land suitable for construction with high land prices, planning restrictions which have lengthy approval processes, a history of high interest rates, and high construction costs (i.e., high wages due to Brexit, shortage of skilled builders, import tariffs on construction materials), have all contributed to a constrain in supply.

Intervention to alleviate the issue has been evident as The Bank of England reduced interest rates from 5.25% to 5%, which is also expected to reduce further (BBC News, 2024).  While this reduction could increase demand for mortgages and reduce demand for rent homes, potentially alleviating the rental homes crisis, the impact of the changes is ultimately obscure and idealistic. This is because changes will depend on how quickly the housing market responds to lower interest rates and because interest rates would only solve part of the demand side of the issue, yet the constraint in supply due to the issues mentioned persists.

References

Office for National Statistics (2024) Index of Private Housing Rental Prices, UK: January 2024. Available at: https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/indexofprivatehousingrentalprices/january2024(Accessed: 30 September 2024).

BBC News (2024) Bank of England cuts interest rates to 5% as inflation eases. Available at: https://www.bbc.co.uk/news/business-57764601 (Accessed: 30 September 2024).

 

About the author

Sevin is a Business with Law student in her second year. With an interest in law, economics, and business operations, she will aim to explore ways the law influences economic policies and current affairs.

Contact details for any questions or collaboration: bs23254@qmul.ac.uk

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