Your guide to the cost of living crisis and its impact on the private rented sector

The energy crisis is still here, but has evolved to bring about the cost of living crisis too.

With rising rents, the increased cost of bills, and, therefore, a dip in the disposable income for many tenants, here's an outline of how we got to this point.

The cost of living crisis is due to a fall in "real" disposable income. This means that costs are increasing more quickly than an individual or a household's earnings.

How does the government measure increasing living costs?

The government tracks this cost of living increase using the ​​consumer price index, which monitors how quickly the price increases for certain everyday items.

How much has the cost of living gone up?

The change in price for these everyday items in the consumer price index gives us the annual inflation rate, currently sat at a 40-year high of nine percent.

An increase in the cost of energy has been a primary catalyst for this cost of living increase in 2022.

Back in September 2021, the Guardian outlined "a perfect storm of market forces" which brought the energy crisis to the UK.

A cold winter where gas supplies ran low preceded industry activities starting to ramp up again, post-pandemic.

Countries were left scrabbling to secure gas from a limited supply, and a windless summer meant that wind farms also couldn't help support the shortfall - leading to even more gas burned for electricity.

Wholesale gas prices shot up due to this high demand outstripping supply.

In the UK, we have an historic dependency on gas supplies. We rely on gas ​​for home heating and cooking, yet have limited gas storage capabilities.

This means that our providers tend to rely on a regular delivery of gas, rather than being able to stockpile it at a cheaper price.

The price cap regulations in the UK - meaning that suppliers can't immediately pass these costs to consumers - combined with low entry barriers to new energy providers meant that many small suppliers started to fold, unable to bear these rising costs.

What happens if an energy supplier fails?

Even though the price cap slowed the effect of this increase on energy tariffs, customers of the failed suppliers had to switch to a new - and normally more expensive - supplier. 

You can find the list of failed suppliers and their replacements in our Energy Supplier Tracker.

Initially, the price cap meant that energy suppliers had to bear the extra cost of gas.

However, in October 2021, the price cap increased average annual household prices by £139 to £1,277, or by £153 to £1,309 for pre-payment customers.

In April 2022, the price cap rose again by 54%, up to £1,971 per year. For customers with pre-payment meters, it increased from £1,309 to £2,017.

When will the price cap increase again?

We're now awaiting a third price cap increase. The amount will be announced on 26 August 2022, expected to add an additional £800 to the average household's annual bills, rising to an estimated £2,800, according to Ofgem.

However, Cornwall Insights has already predicted that energy prices may jump to £3,244 a year, bearing in mind the impact of the "global political and economic uncertainty" on the energy market.

The new price cap will then take effect from 1 October 2022. The uncertainty in Ukraine has also led to Ofgem announcing that it will start to review the price cap quarterly instead of twice a year.

The cost of energy is inescapable, and affects all areas of the economy. For the lettings industry, this is starting to shine through and impact the industry in a few different ways.

From the steady upward trajectory of rents - exacerbated by low levels of stock - to a change in tenant movement patterns, here are some of the cost of living crisis trends that letting agents should be aware of.

Since Covid-19 restrictions have lifted and tenant demand has started to grow, low housing stock has started to push up rents.

Now, the rising cost of living in the UK has added an extra dimension to this growth - and shows no signs of slowing.

Landlord Action's Paul Shamplina has predicted that the number of possessions in the private rented sector could jump by more than 40,000 in 2022, due to the increasing cost of living.

His company has even taken on more solicitors in recent months to handle the increased number of landlords starting to seek to evict tenants.

Simon Tillyer at Vouch has shared that there is not the same level of financial support for tenants now as during the pandemic.

"There are a few measures in place, but they're not going to tackle the problems that many people may now face," he says.

And that's where rent protection can come in, to help support landlords and their income throughout.

Vouch's Ben Tyers says that landlords would need to increase their rents to compensate for unpredictable increases in energy, so many have chosen to stop including bills in the rent.

However, co-living properties with bills included are growing in popularity as tenants start to look for more stable monthly payments, to help them budget.

Tyers has also seen that tenants are more apprehensive about moving to another rented property, if they're already renting, preferring to let a contract roll to periodic.

This is partly due to the rising price of rent, which may make moving more expensive, but also due to the extra costs involved with moving, such as hiring vans or having an overlap in security deposit payments.

If tenants do decide to move, they may choose to downsize - contrary to the trend of upsizing during the pandemic - to counter the rising cost of rents in most parts of England, says Tyers.

"The longer costs continue growing, the more pronounced any new trends in movement and tenant preferences will become," he says.

New research from Saga Equity Release shows that, while one in five parents were financially supporting their adult children in October 2020, for costs such as accommodation, this has grown to one in four.

Alex Edmans, Saga Personal Finance, says: “As dipping into savings or investments becomes less realistic in the cost-of-living crisis, more parents are now considering different approaches to inheritance – be that fast-forwarding plans, gifting sums of money or releasing equity from their homes.”

Over the past four years, requests for guarantors have grown 36%, according to Goodlord's data - and this shows no sign of abating.

Shamplina has also shared that more landlords "have now implemented processes where they have guarantors as part of the mechanism when renting out properties."

As the cost of living continues to squeeze tenants' cash flow, this trend is likely to continue, as agents and landlords take a cautious approach.

Some industry experts are starting to warn that the housing market is softening from its record high prices, as interest rates rise and consumer confidence dips, which may exert a "cooling impact" on the market.

“A toxic combination of factors including the increased cost of living with its associated rising inflation and interest rates, together with the international impact of the crisis in Ukraine means that there is now a noticeable air of caution amongst buyers," says the Managing Director of Auction House, Jeremy Prior.

For landlords, this could be a good thing. As the market softens, this means less competition for properties.  In particular, Auction House has shared that it's seeing fewer auction bids on properties than before, creating potential investment opportunities.

As was the case during the pandemic, agents are well positioned to help support their customers, offering advice and showing understanding in the face of the difficulties some may face.

Goodlord's State of the Lettings Industry Report 2021 found that 7.5% of the tenants surveyed felt that their income wasn't secure. This new crisis may add further pressure to some households' ability to pay rent.

Some tenants may be concerned about rising costs and the first thing that your agency should consider is to make sure that you share relevant information about what these changes could mean for them. 

How can you learn more about your tenants' circumstances?

You should look into which of your tenants may be more vulnerable to the cost of living crisis and its effects.

As you may have done during the pandemic, you can still take the opportunity to send around a questionnaire to your tenants, to understand their circumstances, and set out a payment plan where necessary.

How can you help your low income and vulnerable tenants?

Some of your tenants may struggle to pay their bills and fall into fuel poverty, as they start to spend more than 10% of their wages on energy.

You should be prepared to advise any of your tenants who fall into this category of the financial help available to help them to avoid this situation, and suggest that they speak with their energy supplier too.

What financial support may be available for your tenants?

The government has announced various support schemes for households during the cost of living crisis, alongside the support already in place for more vulnerable or low income groups.

The new support includes:

• The Energy Bills Support Scheme: A one-off grant payment £400 for all households
• Cost of living Payment for those on benefits: A one-off payment of £650, made in two instalments
• Pensioner Cost of Living Payment: £300, paid as a top up to the Winter Fuel Payment, for those eligible
• Disability Cost of Living Payment: A one-off payment of £150 in September 2022

Pre-existing support covers:

• Council tax rebate: £150 back for council tax bands A-D, from April 2022
• Warm Home Discount Scheme: £150 off the energy bill during the winter months, for low income individuals or fuel-poor pensioners
• Cold Weather Payment: £25 per day over a seven-day period, if the average temperature where they live is zero degrees celsius or below over those days, between 1 November and 31 March, for those on certain benefits or support for mortgage interest
• Winter Fuel Payment: Between £100-£300 for those born before 26 September 1955, or if you lived in the UK for one day between 20-26 September 2021 (the "qualifying week")
• Grants from energy trusts: Tenants should contact their energy provider, to see if this is something that they offer, if they're struggling to pay their bills
• Household Support Fund: Tenants should contact their local council if they're struggling to pay their bills, to see if they have any grants available

The energy crisis and the increase in the cost of living may of course concern your landlords too, especially if they include bills in the rent across a large portfolio of properties.

What can you advise your landlords as the cost of living crisis grows?

When planning any rent reviews, you should ensure that your landlords are considering all costs  appropriately.

If your landlord has a good and financially stable tenant, you should discuss whether they want to raise the rent in line with the current market and risk losing that tenant, or whether they wish to offer a compromise on the rent increase - if possible, based on their current outgoings - to ensure they keep that tenant for longer.

You should also consider advising your landlords to pass on the government's £400 cost of living grant to their tenants, if the tenancy includes bills, as this may be the difference between the tenant falling behind on their rent payments or not.

How can you help protect their investment?

As previously mentioned, a rent protection policy could also offer extra peace of mind to landlords that they'll continue to receive their income throughout this uncertain time if their tenants struggle to meet their contractual obligations.

You can also help your landlords look into their existing mortgage deal to see if they could make any savings on current offers, if they're coming to the end of their contract in the next couple of years.

As Goodlord's Head of Tenancy Services, Rik Smith, highlighted in his recent blog, rising energy prices is a short-term problem, while the energy efficiency of the UK's housing stock is an issue which will have longer-term effects on the industry.

The government has reiterated its plans to increase the minimum energy efficiency standards in homes for all rental properties in two stages, applying to new tenancies from 1 April 2025 and all tenancies by 1 April 2028. Currently, all private rented properties are required to obtain a rating of E or above.

Landlords that need to upgrade properties to reach an EPC band E are currently expected to invest no more than £3,500 in the upgrades. The new standards would up this maximum investment to £10,000.

"Tenants are more conscious about EPC ratings now," says Hamza Anwar, Director at Martin & Co. Blackpool.

"The government's whole idea was for tenants to choose a property that would be more efficient so it's good for tenants to be looking at this document and making decisions."

Landlords that choose to upgrade their properties' energy efficiency earlier rather than later will help create a more viable property for their tenants going forwards.

Research has shown that tenants could save £725 on average, when moving from a property with an EPC E rating to a C rating. In the current economic climate, that £725 could make a big difference to their ability to pay their rent.

Energy efficient properties won't simply be needed to stay compliant. If your landlords hope to sell up, they should consider how investors will view their properties.

Hamptons' research showed that 50% of the properties bought by investors between January and February 2022 had an EPC rating A-C.

"I was recently marketing an investment property for a landlord," says Anwar. "I had a conversation with an overseas investor and they opted not to buy that property because it was E rated so the landlord lost out on a potential purchase."

Agents should help identify the opportunities to improve the energy efficiency of their landlords' properties, and advise on the incentives available, Propertymark has advised.

Although it is an extra financial outlay while costs are rising, short-term energy savings, the long-term investment prospects, and avoiding fines for non-compliance are all strong reasons to have a conversation with your landlords about how and where they can improve their properties' energy efficiency.

What financial support is available for EPC upgrades?

There is limited financial support available to help support landlords through this transition. As Rik Smith says, the "cherry on the cake" when the government announced extra financial cost of living crisis support would have been an "insulation grant scheme available tomorrow".

You can find a list of energy efficiency financial support schemes available to help landlords to upgrade their properties in our guide.

The information found in this page is intended as a guide only. For more details about your legal obligations as a letting agent or landlord operating in the private rented sector, visit gov.uk.