What 2017 has in store for the UK's private rental market

The housing crisis is one of the biggest issues facing the UK, particularly in the worst affected areas, such as London. A severe housing shortage has driven up rents in recent years at a time when incomes have fallen. Should we expect more of the same in 2017? And what impact will the government's so-called "war on landlords" have on the market?

"It is difficult to think of a period when there have been so many external interventions in the private rental sector as yet seen during 2016," said Martin Totty, chief executive of HomeLet, a landlord insurance firm. "The impact of many of the changes are yet to be worked through and it's unclear yet who will emerge as the 'winners and the losers'."

Rents in London are hitting an affordability ceiling

Rents in Greater London are now rising more slowly than almost everywhere else in the country, having soared so high in recent years amid an acute housing shortage in the city. The average London rent is still much higher in nominal terms than everywhere else.

But there are signs that rents are reaching their affordability limits in the city. Renters simply cannot afford to pay more and incomes must now play catch up.

The HomeLet index shows the city's average monthly rent rose 1.6% over the year to November 2016, hitting £1,521. This is the same rate of growth as the East Midlands, where the average rent reached £596, but lower than every other region. The average UK rent rose by 3.1% over the year to £898. This slowdown in London is likely to extend into 2017.

The ban on tenant letting fees may come in

Chancellor Philip Hammond announced in his Autumn Statement that the government would bring in a ban on letting agent fees for tenants "as soon as possible" after a consultation. The burden of letting fees, which can run into hundreds of pounds for tenants, will instead fall on landlords. It's likely the ban will be introduced in 2017, though it may be the following year.

Landlord groups warn this will mean higher rents as the costs are passed down again. But, even if this does happen, and it is not certain that it will, the cost of renting will be more transparent for renters, who are currently often hit with hidden letting fees before they can move in.

Fewer buy-to-let investors are likely to enter the market

Most of the changes affecting landlords have already come in, notably the 3% surcharge on stamp duty for buy-to-let investors, pushing up their cost of doing business. But one big change will begin in April 2017 — the scaling back of tax relief for landlords which lets them offset their mortgage interest costs against their income tax bills.

The cumulative effect of these changes are, say landlord groups, that some buy-to-let investors will leave the sector and fewer new entrants will put money in. And though this will free up property for ordinary homebuyers, it could also mean a reduction in much-needed rental supply – putting further pressure on rents.

According to the Association of Residential Letting Agents (Arla), 37% of agents think supply will fall in 2017, while 52% believe rents will rise. "The government continues to lash out against the private rented sector to cover its own failure to build the number of homes this country needs," said David Cox, managing director of Arla.

"Such policies will have a detrimental effect on the very people the government aims to help the most. As a result, we predict 2017 will be a raw year for renters. We now need stabilisation from the government before tenants are squeezed dry of every penny."

The estate agent Knight Frank predicts rental growth of 1.4% across the UK in 2017, up from 1.2% the previous year. "Rents could rise further if landlords begin to sell properties in an effort to offset the impact of tax rises," said the forecast.

New housing supply is still lacking as demand rises

Housebuilding levels continue to run far below what is needed to meet demand, though they are rising. The government is channelling billions more in funding to support the construction of a million new homes by 2020, there are doubts it will achieve this target.

There has also been a shift in tone, with ministers indicating they are moving away from homeownership as a priority, and towards building more homes for rent. But supply will not catch up with demand any time soon, and definitely not in 2017. And as aspiring homeowners continue to struggle to step onto the property ladder, demand will only rise.

"Reduced transaction levels and the prospect of tighter lending criteria are expected to continue to drive demand into the private rented sector from frustrated would-be homeowners," said Lucian Cook, director of residential research at Savills.

"While demand continues to rise, supply is likely to be constrained by the reduced buying activity of private investors. That indicates that rental growth will exceed household earnings growth, facilitated by greater levels of sharing and more affluent groups of renters."