On 3 November 2022, the House of Lords is due to debate the following motion tabled by Lord Sharkey (Liberal Democrat):

That this House takes note of the importance of stability in the financial markets and its impact on pensions, mortgages and the rental market.

1. Stability in the financial markets

1.1 Financial stability and the Bank of England

The Bank of England has a statutory objective to “protect and enhance the stability of the financial system of the United Kingdom”.  This is known as the ‘financial stability objective’. In its financial stability strategy, the Bank sets out a definition of ‘financial stability’ as one of the guiding principles of the strategy:

Financial stability is the consistent supply of the vital services that the real economy demands from the financial system (which comprises financial institutions, markets and market infrastructure).

The Financial Policy Committee (FPC) leads the Bank’s work on financial stability. It was established in 2013 as part of a new system of regulation brought in to improve financial stability after the financial crisis of 2007–08. The FPC has its own statutory objective to contribute to achieving the Bank’s financial stability objective. It is required to do this primarily by identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system. Those systemic risks include, in particular:

  • systemic risks attributable to structural features of financial markets, such as connections between financial institutions
  • systemic risks attributable to the distribution of risk within the financial sector
  • unsustainable levels of leverage, debt or credit growth

The FPC also has a secondary objective to support the economic policy of the government, including the government’s objectives for growth and employment.

The FPC usually meets four times a year. After each meeting, it publishes its views of the risks to the UK financial system and how to tackle them. These are referred to as a ‘summary and record’ of the meeting. Twice a year, in Q2 and Q4, the FPC also publishes a more detailed financial stability report. This sets out the FPC’s view on the stability of the UK financial system and what it is doing to remove or reduce any risks to it. If the FPC identifies a potential risk, it has binding powers to direct the Prudential Regulation Authority (PRA) and/or the Financial Conduct Authority (FCA) to act. It can also make recommendations to the PRA, FCA and other bodies.

When it published the summary and record of its most recent meeting, held in September 2022, the FPC highlighted that “financial stability is not the same as market stability or the avoidance of any disruption to users of financial services”. However, as explored in section 2 of this briefing, the events of September to October 2022 have shown that the FPC is prepared to intervene where it assesses that dysfunction in the financial markets poses a risk to the UK’s financial stability.

1.2 Financial markets

The Bank of England website explains that financial markets “exist to bring people together, so money flows where it is needed the most”. The US Treasury expands this definition, explaining a financial market is “any place or system that provides buyers and sellers the means to trade financial instruments, including bonds, equities, the various international currencies and derivatives”. It explains that financial markets facilitate the interaction between those who need capital with those who have capital to invest. They also allow participants to transfer risk (generally through derivatives) and promote commerce. The Bank of England gives examples such as: providing finance for companies so they can hire, invest and grow; providing money to the government to help it finance infrastructure projects; and helping individuals take out a mortgage or save for retirement. The Bank argues that “when they work well, financial markets can be big drivers of prosperity, but as the financial crisis has shown, markets can get it wrong”.

In a recent report, the Financial Stability Board (FSB) highlighted the importance of government bond markets when it comes to financial stability. The FSB is an international organisation that monitors and makes recommendations about the global financial system. It said government bond markets were “crucial from a financial stability perspective” because of their role:

  • in financing government activities
  • as a ‘safe haven’ in periods of stress
  • as a benchmark for the pricing of other (risky) financial instruments
  • as a key collateral asset (particularly as markets have migrated towards secured lending)
  • in capital and/or liquidity regulatory requirements for a number of financial institutions, such as banks and money market funds

In simple terms, a bond is an IOU issued by a government or a company when it wants to borrow money. In return for loaning the money for a fixed number of years, investors earn a regular rate of interest, known as a ‘coupon’. When the bond reaches maturity, the capital invested (the principal) should be repaid in full. As Barclays bank explains, the main risk with bond investing is that the issuer could get into financial trouble and find itself unable to meet its interest payment obligations or ultimately repay the principal. Bonds can trade on the secondary market and change hands between investors. The price at which they are bought and sold will generally be determined by two factors: interest rates and how attractive the issuer is perceived to be.

Bonds issued by the UK government are known as ‘gilt-edged securities’ or ‘gilts’ for short. They are managed on behalf of the government by the Debt Management Office (DMO). The DMO explains on its website that the term ‘gilt-edged security’ is a “reflection of the fact that the British government has never failed to make interest or principal payments on gilts as they fall due”. With conventional gilts, the interest payment (coupon) is a fixed payment. With index-linked gilts, the value of the coupon and the principal repaid to the investor can change over time in line with the retail price index measure of inflation. Conventional gilts amount to around three quarters of the government’s stock of debt, and index-linked gilts one quarter.

Typically, the interest rate available on gilts is relatively low as they are, in the words of Barclays, “widely viewed as being among the safest type of bond”. However, as John Fender, emeritus professor of economics at the University of Birmingham, has explained, rates vary according to investors’ perceptions of risk:

Gilts in the UK are considered safe as there is confidence the government will not default. However, if a government loses credibility that it will repay its debt, then potential holders will require a higher return to compensate for the extra risk, so the government will need to offer a higher return on gilts.

2. Events of autumn 2022

The events of September and October 2022 illustrated the Bank of England intervening to address dysfunction in the financial markets where it assesses this could have negative impacts on the stability of other parts of the financial system.

2.1 FPC’s July financial stability report

In its financial stability report of July 2022, the FPC had already identified volatility in both the financial and commodity markets as a result of global events:

The economic outlook for the UK and globally has deteriorated materially. Following Russia’s illegal invasion of Ukraine, global inflationary pressures have intensified sharply. This largely reflects steep rises in energy and other commodity prices that have exacerbated inflationary pressures arising from the pandemic, and further disruption of supply chains. Household real incomes and the profit margins of some businesses have fallen as a result. Global financial conditions have also tightened significantly, in part as central banks across the world have tightened monetary policy. Market interest rates and corporate bond spreads have risen sharply, reflecting expectations of further policy tightening in response to renewed risks of more persistent elevated inflation and increasing credit risk.

The FPC said that global financial markets had been “volatile in recent months”, reflecting these developments in the economic outlook. It said the UK’s core financial markets “remained functional, with participants able to execute trades, albeit at higher costs”. However, it warned conditions “could continue to deteriorate, especially if market volatility increases further”.

2.2 ‘Mini budget’

The then chancellor, Kwasi Kwarteng, set out Liz Truss’s government’s growth plan in a fiscal statement on 23 September 2022. This has come to be referred to as the ‘mini budget’. Mr Kwarteng announced a range of tax measures (including tax cuts, rate freezes and halting some planned tax increases) that he said were aimed at boosting growth. It was estimated that these measures would have reduced Treasury revenues by about £45bn a year by 2026/27. Mr Kwarteng also suggested days after the mini budget that there was “more to come” in terms of tax cuts. At the mini budget, the Treasury also provided the first cost estimate of the government’s energy support package for households and businesses, putting it at around £60bn. The government did not ask the Office for Budget Responsibility (OBR) to produce forecasts for the mini budget.

The government faced criticism for its plans to borrow to fund tax cuts. Commenting before the mini budget was delivered, the Institute for Fiscal Studies (IFS) said:

Allowing debt to rise temporarily to finance one-off packages of support, such as the energy price guarantee or the furlough scheme, in exceptional circumstances is justifiable and can be sustainable, but the same case cannot be made for allowing debt to rise indefinitely in order to enjoy lower taxes now.

Following the chancellor’s statement, the IFS’s director, Paul Johnson, said it was “the biggest package of tax cuts in 50 years, without even a semblance of an effort to make the public finance numbers add up”. He claimed that the chancellor’s plan “seems to be to borrow large sums at increasingly expensive rates, put government debt on an unsustainable rising path, and hope that we get better growth”.

The International Monetary Fund (IMF) urged the government to “re-evaluate” the tax cuts in the mini budget. It said:

Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy.

Following the fiscal statement there was volatility in the financial markets, leading to an increase in government borrowing costs and a devaluation of sterling against the US dollar and other international currencies. On 26 September 2022, the pound reached a record low against the US dollar, with £1 worth $1.03. Long-term gilt yields rose by 30 basis points over the course of 23 September 2022 and by a further 50 basis points by the end of 26 September 2022. After falling back 20 basis points in the morning of 27 September 2022, they had risen again by 67 basis points by the end of the day. The Bank of England has said that the five largest moves in gilt yields since it started keeping records in 2000 came between 23 and 28 September 2022.

2.3 Bank of England intervention

Andrew Bailey, the governor of the Bank of England, announced on 26 September 2022 that the Bank was “monitoring developments in financial markets very closely in light of the significant repricing of financial assets”. Subsequently, on 28 September 2022, the Bank of England announced that it was intervening in the bond market in response to “significant repricing of UK and global financial assets”. The Bank announced that it would begin temporary purchases of long-dated UK government bonds on “whatever scale is necessary” to “restore orderly market conditions”. It said it would purchase conventional gilts with a residual maturity of more than 20 years, initially at a rate of up to £5bn per auction. Auctions would take place until 14 October 2022.

The FPC had assessed the risk to UK financial stability from “dysfunction” in the gilt market on 28 September 2022 and recommended the Bank act. It found that the “rapid and unprecedented” rise in long-term gilt yields had “exposed vulnerabilities” associated with the liability-driven investment (LDI) funds in which many defined benefit pension schemes invest. The FPC said this led to a “vicious spiral of collateral calls and forced gilt sales that risked leading to further market dysfunction, creating a material risk to UK financial stability”. It judged this would have led to “an unwarranted tightening of financing conditions and a reduction in the flow of credit to households and businesses”.

The Bank took further action on 10 and 11 October 2022. It raised the maximum size of its purchase for each auction from £5bn to £10bn per day. This was in response to information from LDI fund managers that gilt sales were more likely to be concentrated in the latter half of the operation. It also launched a ‘temporary extended collateral repo facility’ (TECRF) to run until 10 November 2022. This facility enables banks to borrow from the Bank against a wider than usual range of collateral to help the banks “ease liquidity pressures facing their LDI client funds”. The Bank said its operations were intended to “restore market functioning in long-dated government bonds and reduce risks from contagion to credit conditions for UK households and businesses”. The purpose of its operations was to enable LDI funds to “address risks to their resilience from volatility in the long-dated gilt market”. On 11 October 2022, the Bank announced it would widen the scope of its daily gilt market purchases to include index-linked gilts (as well as conventional gilts) for the first time. This was in response to its assessment that “the risk of self-reinforcing ‘fire sale’ dynamics was most pressing in the more illiquid segment of the gilt market”.

The Bank’s final gilt purchases as part of this financial stability operation took place on 14 October 2022 as planned. In total, the Bank purchased £12.1bn of conventional gilts and £7.2bn of index-linked gilts.

Sir Jon Cunliffe, the Bank’s deputy governor for financial stability, assessed on 18 October 2022 that LDI funds were now “significantly better prepared to manage shocks of this nature in the future”. However, he suggested that markets “may remain volatile in the coming weeks”. He also emphasised the need for further work to address vulnerabilities in non-bank financial institutions (NBFIs). He warned that if NBFIs’ resilience to sharp reductions in asset prices and liquidity was not improved, “the financial stability risks associated with core market dysfunction could resurface in other ways or in other parts of the financial system”.

2.4 Reversal of mini budget measures

Further political and fiscal changes happened during and after the period of the Bank’s gilt market operations. On 3 October 2022, Mr Kwarteng said the government would not go ahead with its plan to abolish the 45% additional rate of income tax. On 14 October 2022, Liz Truss, the then prime minister, appointed Jeremy Hunt as chancellor, replacing Kwasi Kwarteng. She also said her government would not go ahead with cancelling a planned increase in corporation tax rates. On 17 October 2022, Mr Hunt announced further revisions to the plans announced in the mini budget, reversing most of the remaining tax measures.

When announcing these changes, Mr Hunt referred to the relationship between economic stability, government policy and the role of the markets:

A central responsibility for any government is to do what’s necessary for economic stability. This is vital for businesses making long-term investment decisions and for families concerned about their jobs, their mortgages and the cost of living. No government can control markets, but every government can give certainty about the sustainability of public finances and that is one of the many factors that influence how markets behave. And for that reason, although the prime minister and I are both committed to cutting corporation tax, on Friday she listened to concerns about the mini budget and confirmed we will not proceed with the cut to corporation tax announced. The government has today decided to make further changes to the mini budget and to reduce unhelpful speculation about what they are, we’ve decided to announce these ahead of the medium-term fiscal plan which happens in two weeks […] because these decisions are market-sensitive, I’ve agreed with the Speaker the need to give an early brief summary of the changes, which are all designed to provide confidence and stability.

Mr Hunt also announced the formation of a new Economic Advisory Council to advise the government on UK and international economics and financial markets.

The chancellor was expected to publish the government’s fiscal rules alongside an OBR forecast and further measures on 31 October 2022. However, this has been delayed following the appointment of Rishi Sunak as the new prime minister. A full autumn statement is now due to take place on 17 November 2022.

The pound rose and gilt yields fell after Mr Hunt announced the reversal of many of the mini budget’s planned measures. The Bank of England noted that as of 18 October 2022, the pound was up against all other currencies, with the trade-weighted GBP index around 1.4% higher than the day before by market close. Compared to the day before the mini budget, 30-year gilt yields were 60 basis points higher. This compared to 35 basis points for the US and 42 basis points for Germany over the same period.

3. What were the impacts?

3.1 Pensions

The Bank’s gilt market operations were intended to address liquidity problems with liability-driven investment (LDI) funds caused by changes in gilt yields. This could have had particular impacts on some defined benefit (DB) pension funds.

The Bank has explained that LDI is an investment approach used by DB pension funds to help ensure the value of their assets (their investments) moves more in line with the value of their liabilities (the DB pensions they have promised to pay in the future). The closest match for the risks around the value of the liabilities is long-term gilts, particularly those linked to inflation. LDI strategies enable DB pension funds to use leverage (borrow) to increase their exposure to long-term gilts, while also holding riskier and higher-yielding assets to boost their returns. The LDI funds maintain a cushion between the value of assets and liabilities, intended to absorb any losses on the gilts. If losses exceed the cushion, the DB pension fund investor is asked to provide additional funds to increase the cushion. This can be a more difficult process for pooled LDI funds, in part because they manage investment from a large number of small and medium-sized DB pension funds.

The Bank explained that the rapid move in gilt yields in late September 2022 threatened to exceed the size of the cushion for many LDI funds. This required them either to sell gilts into a falling market or to ask DB pension plan trustees to raise funds to provide more capital. For some LDI funds, the scale and speed of the changes in yield and consequent decline in net asset value outpaced the ability of the DB pension fund investors to provide new capital in the time available. This was a particular problem for pooled LDI funds, given the large number of smaller investors. LDI funds would then have been forced to sell gilts at levels far exceeding the normal amount of daily gilt trading. The Bank said some LDI funds had already tried to sell gilts but had been unable to do so. With the gilt market unable to absorb further large sales, the Bank said it would have led to “a self-reinforcing spiral of price falls and further pressure to sell gilts”.

The Bank said if it had not intervened on 28 September 2022, a large number of pooled LDI funds would have been left with negative asset value and would have faced shortfalls in the collateral posted to banking counterparties. DB pension fund investments in those pooled LDI funds would have been worth zero. If the LDI funds defaulted, banks that held their gilts as collateral might have tried to sell these gilts, further impairing the gilt market. The Bank said this in turn would have forced other institutions to sell assets to raise liquidity, which in turn may have led to “an excessive and sudden tightening of financing conditions for the real economy”.

The Pensions Regulator has said that DB schemes were not at risk of “collapse” due to the rapid movements in gilt yields. It said the key challenge for schemes was the ability to access liquidity at short notice. Similarly, the Pensions and Lifetime Savings Association, a trade body, said members of DB pension schemes should be “reassured that their pension benefits are safe”. It said scheme funding was “strong” and “despite the operational challenges, funding will have been strengthened further by rising yields”.

Defined contribution (DC) pension schemes were affected differently by recent events in the gilt markets. In DC schemes, members build up a pot of money to provide an income in retirement. The income depends on factors including the amount of contributions paid in, the fund’s investment performance and the member’s choices at retirement. The Pensions Regulator said the issue affecting DB schemes with LDI investments does not apply to DC schemes, as they do not use leverage in their default strategies. However, it said DC members may have experienced a reduction in value of their savings, particularly if they are invested in gilts. This is because the value of gilts has fallen as yields have risen over 2022. It said members closer to retirement were likely to have a higher allocation of gilts. They were therefore more likely to have seen a greater fall in the value of their DC savings than members further from retirement. However, the Pensions Regulator also said people purchasing an annuity might find they could achieve a “materially higher” pension as yield changes feed through to annuity rates.

3.2 Mortgages

Mortgage rates have been rising over the last year as the Bank of England has raised the Bank rate in an effort to meet its target of keeping inflation at 2%. However, rates rose more steeply in the days following the mini budget. For instance, in December 2021, the average rate offered for a two-year fixed mortgage deal was 2.34%. By 23 September 2022, the day of the mini budget, this had gone up to an average rate of 4.74%. It rose again to 5.75% by 3 October 2022 and then, two days later, the average rate for a two-year fixed rate mortgage had risen to 6.07%. This was the first time it had gone above 6% since November 2008.

The interest rates on offer for fixed-rate mortgages are influenced not just by changes in the Bank rate, but also by movements in financial markets. The consumer website MoneySavingExpert has explained this as follows:

Variable-rate mortgages, in particular tracker mortgages, are normally impacted by any movement to the Bank of England’s base rate. This has risen steadily since December 2021 (currently it sits at 2.25%), meaning rates on variable mortgages have been increasing. The base rate is widely expected to rise again on Thursday 3 November, when the Bank of England conducts its next review.

Fixed-rate mortgages, on the other hand, are impacted by additional factors, such as ‘swap rates’, which are basically long-term interest rate predictions. A swap rate is the rate mortgage lenders pay to get the funding which allows them to offer fixed-rate mortgages to borrowers. The cost of these swap rates is in turn heavily influenced by the value of ‘gilts’ […]

In the days after the mini budget, mortgage lenders withdrew deals from the market at an unprecedented rate. The comparison website Moneyfacts reported that the mortgage market was contracting “as lenders react to volatile financial markets”. It said the number of residential mortgage deals on offer dropped from 3,961 on the morning of 23 September 2022 (the day of the mini budget) to 2,340 by 29 September 2022. This represented a fall of 40%. According to the Financial Times, it was “the sharp jump in government bond yields [that] forced lenders to withdraw home loans for new customers, as they had become difficult to price”. As of 18 October 2022, Moneyfacts said the number of deals available was fluctuating “as lenders tweak their offerings, and interest rates continue to climb”.

Mortgage rates continued to rise after the government abandoned most of the measures in the mini budget on 17 October 2022. The average rate for a two-year fixed-rate deal rose to 6.53% on 18 October 2022, the highest rate since August 2008. For a five-year fixed-rate mortgage, it was 6.36%, the highest since November 2008. The Financial Times reported that brokers thought rates had reached their peak at this point. It said they expected rates to come down over the new few weeks “after a rebound in the gilt market sparked by new chancellor Jeremy Hunt’s reversal of many of the tax cuts”.

Rising rates and the withdrawal of mortgage deals have affected homebuyers and homeowners. According to press reports, some buyers faced losing the properties they were hoping to buy when their mortgage offers were withdrawn. In some cases, buyers reportedly lost thousands of pounds in deposits and legal fees when their purchase collapsed. In addition, first-time buyers reported being priced out of the property market by the rapid increase in mortgage rates.

People coming to the end of their existing fixed rate deals face increased mortgage costs as they either move to their lender’s standard rate or remortgage to a new deal with a higher interest rate. The MoneySavingExpert website calculated that for each 1 percentage point someone’s mortgage rate increases, they would pay roughly £50 a month more, or £600 a year, for every £100,000 of mortgage debt. This has raised concerns about homeowners’ continued ability to afford their mortgage repayments. Simon Rubinsohn, chief economist of the Royal Institution of Chartered Surveyors (RICS), assessed that mortgage arrears and repossessions would “inevitably […] move upwards over the next year as pressure on homeowners grows”.

Martin Lewis, founder of the MoneySavingExpert website, suggested that fewer people would be able to pass lenders’ affordability checks to access the cheapest mortgage rates. He also feared if house prices fell, it would adversely affect homeowners’ loan-to-value ratio (meaning the amount they want to borrow would equate to a higher proportion of the value of the property). This would also affect their access to the cheapest deal. The best rates are usually offered to borrowers with lower loan-to-value ratios.

The Resolution Foundation recently assessed the impact of rising interest rates on mortgagors’ living standards. This analysis was based on data as of 12 October 2022, which was before Jeremy Hunt reversed many of Kwasi Kwarteng’s fiscal measures. The Resolution Foundation forecast that over 5 million currently mortgaged families—close to one-fifth of all households in Britain today—would be spending more on their housing costs by the end of 2024 than they were in Q3 2022, totalling more than £26bn overall.

The Resolution Foundation emphasised that these increases were largely driven by inflationary pressures and rising interest rates that were present before the mini budget on 23 September 2022. However, it also concluded that “the disruption in the wake of September’s mini budget has made a bad situation worse”. It said increased market expectations of how high interest rates would rise and how soon they would peak had “had a clear additional effect”. It estimated (based on 12 October 2022 data) that by Q4 2024, the average mortgaged household’s payments would be over £800 a year higher as a result of the change in interest rate expectations since the mini budget, almost a quarter (24%) of the total increase.

It said the figures become “more striking” if households that would still be on a low fixed-rate deal by the end of 2024 were excluded. In that case, the average household already hit by rate rises by Q4 2024 would be paying an additional £1,200 a year over and above what they could have expected before the mini budget. However, the Resolution Foundation cautioned that these estimates were “very sensitive to fiscal and monetary policy developments in the months ahead”.

The analysis highlighted that people would be affected differently by rising interest rates depending on factors like income and location. It concluded higher-income mortgagors would be hardest hit in cash terms, but lower-income households with mortgages would see living standards fall the most. For instance, the Resolution Foundation estimated that by Q4 2024 households in the second income decile would be spending the equivalent of 10% more of their income on their housing costs. The comparable figure for households in the highest income bracket would be 4%. It also estimated that the average mortgagor in London, where property prices are higher on average, would be paying £5,500 more in annual costs by the end of 2024, almost two and a half times more than someone in the north-east, where average property prices are lower. The Resolution Foundation concluded that by the end of its forecast period, Q1 2027, “practically no mortgaged household will be untouched by higher rates”.

3.3 Rental market

Rising mortgage rates can also impact the rental market. Faced with increased mortgage costs, landlords may put up rents or decide to stop letting their properties. This in turn could impact the supply of available rental properties and push up rents. The credit ratings agency Moody’s estimated in October 2022 that more than half of landlords looking for a new fixed-rate deal in 2023 or 2024 would be unable to remortgage without raising rents if mortgage rates were 4 percentage points higher. Given falls in real wages, this might push rents up beyond what tenants could afford.

Property firm Hamptons assessed in September 2022 that rising interest rates would have “profound consequences for the profitability of buy-to-let”. It predicted that if the Bank base rate reached 2.5%, the average higher-rate tax-paying investor with a typical 75% loan-to-value ratio mortgage would start making a loss. They would need a rental yield of around 7.0% or more to break even, which Hamptons assessed was not possible in most areas of England and Wales, especially outside the north-east. It suggested some landlords in southern areas would be forced to sell up, and this would put pressure on already low stock levels of rental properties. However, for lower-rate taxpayers and limited company landlords, mortgage interest rates could rise higher before they would start making a loss. Hamptons also noted that around half of landlords owned their properties outright and would not be under the same pressure from rising interest rates.

Pressures in the rental market were already affecting supply and rental prices before the events of autumn 2022. Property firm Knight Frank noted in July 2022 that rents rose at their fastest pace in over a decade in 2021. It said this was “being driven in part by an ever-deepening mismatch between supply and demand”. It said the number of properties available for rent in Q1 2022 was over a third lower than the five-year average pre-pandemic. At the same time, demand from tenants was rising. Propertymark, a membership body for property agents, reported that the number of prospective tenants registering with its members reached a new peak in September 2022. However, the supply of available homes to rent had not risen for months. RICS noted similar trends in its September survey of the residential property market. It found rising tenant demand coupled with a fall in rental properties coming on to the market. It predicted there would be “further strong growth in rental prices over the coming three months”.

Rising rents in the private rented sector have been reported to be squeezing renters’ finances over recent months. The BBC reported in June 2022 that a shortage of properties was leading to tenant bidding wars in some cases. It also suggested that four in ten renters under the age of 30 were spending more than 30% of their pay on rent, which represented a five-year high. While the least affordable areas for young people were concentrated in London and the south-east, rent affordability for young people had also dropped since the pandemic in places like Rotherham, Bolton, Salford, Walsall and Dudley.

According to a survey carried out for the housing charity Shelter in July and August 2022, 32% of private renters spent at least half their monthly household income on rent. Three in ten were behind or constantly struggling to pay their rent. 42% of renters had seen their rent increase in the last year, and 10% of private renters had faced an increase of more than £100 a month. Shelter calculated that if its survey data was extrapolated across the whole population of England, it would mean that 2.6 million adults were spending half or more of their income on rent and almost 2.5 million were struggling to pay, an increase of 45% since April 2022. Shelter said that private renters were “disproportionately exposed to the cost of living crisis”. For instance, it said that private renters were the most likely tenure to already be in fuel poverty. It called on the government to increase local housing benefit allowance rates, frozen since March 2020, to ensure that housing benefit kept pace with rising rents.

Analysts have also said there are other factors influencing supply in the rental market, in addition to rising mortgage interest rates and the impact of volatility in the financial markets. For example, Knight Frank suggested in July 2022 that rising construction costs and energy prices, coupled with labour shortages, had been affecting the number of new developments in the build-to-rent sector. RICS noted in its August 2022 residential property market survey that changes in the tax and regulatory environment for landlords were key reasons for the fall in the number of rental properties on the market. Changes in the way rental income is taxed have resulted in higher tax bills for some landlords. Property firm Hamptons suggested that these changes meant some higher-rate taxpayers with a mortgage are effectively taxed partly on their turnover rather than their profits. It also suggested the government’s white paper on the private rented sector could further increase costs for investors. It said the proposal for all rented properties to achieve an energy performance certificate rating of C or above by 2025 could also result in added costs for landlords. Hamptons believed these changes could lead to more landlords withdrawing from the business, or not expanding their portfolios. It has also been suggested that government proposals to end so-called ‘no fault’ section 21 evictions could make some landlords reluctant to let.

4. Current scrutiny by parliamentary committees

This subject is currently the focus of work by a number of parliamentary committees, including:

Cover image by Anne Nygård on Unsplash.