Big city rents were supposed to tumble amid the pandemic. What went wrong?

In the early days of the pandemic, I thought one long-term silver lining would be to make expensive cities like London cheaper for young renters. I reckoned the shift to hybrid work was going to persist. This would allow office workers to spread further out from overheated urban centres. Plenty of young people would still want the bright lights, but they might not have to pay quite so much to get them.

I couldn’t have been more wrong. Housing costs in London did fall for a while, but now the scramble for rental property is more intense than ever. Advertised rents are shooting up. They are 6 per cent higher than pre-pandemic levels in inner London and 8 per cent higher in outer London, according to data from property website Zoopla.

It is the same story in other big cities, from New York and Miami to Dublin and Sydney.

Where did I go wrong? It’s not that working patterns have reverted to normal. Between 2019 and 2022, the number of people in the UK who work from home more than doubled to almost 10 million, according to the Office for National Statistics. An official survey this year found that 84 per cent of those who had to work from home during lockdowns planned to do hybrid work in future.

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Transactions data

The Pret index, which compares transactions data from Pret A Manger stores with their pre-pandemic average, confirms the shift. Transactions have settled at about 80 per cent of pre-Covid levels in office worker districts such as the Square Mile and Canary Wharf.

So what explains the rise in city rents? Some people did spread out: Londoners to places such as Dartford and Margate; New Yorkers to the Hudson Valley. But I underestimated how many would want to stick around in big cities – keen to enjoy their pleasures even if they weren’t going to the office every day.

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That said, what is happening now isn’t just about people wanting to be in flashy capitals. In the UK, rents are on the rise in cities across the country from Brighton to Manchester and York. It is a nationwide trend in the US, as well.

On the demand side, one widespread phenomenon is that people decided they didn’t want to live so crammed together after the claustrophobia of lockdowns. Economists at the US Federal Reserve have noted that relatively fewer adults in the US are now living with roommates and more are living alone. The resulting rise in the number of households has contributed to the recent “huge increase” in housing demand, they say.

The same phenomenon has happened in Australia. There isn’t enough data to say if it’s true of the UK too, though it seems likely. As well as that longer-term trend, there is the short-term fact that economies have reopened: students are back; migrants are coming again; necessary moves delayed by Covid-19 have all happened at once.

Landlord associations

Meanwhile, supply has dropped. In many places, people are renting for longer than usual (perhaps because buying has become more expensive) which means fewer places coming on to the market at any given time.

In the UK, landlord associations also say some people have sold up because of rising tax and regulation. Zoopla told me there are about 50 per cent fewer homes available for rent per lettings branch in London than there were between 2017 and 2021 and 30 per cent fewer in the rest of the country.

It’s possible that rents will soon hit the limit of what people can afford, given the wider cost-of-living crisis. Private renters spend an average 31 per cent of their household income on rent, compared with 27 per cent for social renters and 18 per cent for homeowners with mortgages. That means they have less flexibility to cope with rising energy costs. Alternatively, people might start sharing housing more with others again to cut their rent bills.

Whether or not rents stabilise or fall in the UK, it won’t happen soon enough to stop a rise in homelessness this year. It might sound foolish to end a column about being wrong by making another prediction, but sadly I think this is firm ground.

A long-term failure to build enough social housing means about a quarter of those in the private rented sector rely on housing benefits to help pay the bill. But housing benefit has been frozen since April 2020, so it becomes less adequate as time goes on. When landlords sell up or people need to move, those reliant on housing benefit will increasingly struggle to find places they can afford.

More than 70,000 families and individuals were homeless or threatened with being so and eligible for help in England in the first quarter of this year. The number of this group who were in full-time work was the highest since the data began. Rough sleeping in London is on the rise already. As Matt Downie of the homelessness charity Crisis told me: “We’re not waiting for it to happen – it is happening.” – Copyright The Financial Times Limited 2022