Demand for private rented housing is set to rise by 600,000 households by 2021, a new report shows.  And in order to meet this demand, new investment of over £100 billion will be required.

"Demographic changes are the primary driver of future demand for rented housing," comments the report author Richard Donnell, director of research at Hometrack. However, the report highlights three main factors that may result in the scale of demand exceeding this central projection.

• Unaffordable House Prices
  Donnell calculates that 69% of private renters cannot afford to access ‘entry level’ owner-occupier housing (i.e. cannot afford to buy a house at the lower quartile house price). This group includes the 22% of private tenants who are in receipt of housing benefit.
  
  "If house prices continue to remain relatively high then more households will fall into this affordability trap, increasing rental demand yet further," comments Donnell.

• Net Migration
  The rental market feels much of the initial impact of in-migration. The latest household projections assume net migration of +130,000 people per annum. However, over the last 5 years net migration has been running in excess of 200,000 per year, particularly from the EU. If future levels of migration remain strong then the impact will be felt most immediately in the private rented sector.

• Changes in attitudes towards renting as a desirable tenure choice
  Short term aspirations towards homeownership within the younger age groups have reduced over recent years, according to the Council of Mortgage Lenders. There is also some evidence that young households are seeing the benefits of renting as a tenure choice. If we are to see even a modest a change in the propensity of households towards renting then the scale of demand for rented accommodation would increase further.

The report highlights that the bulk of demand is likely to originate from the ‘mid-market’ and ‘affordable’ segments that account for the majority of demand today. These two groups contain households who are either unable to access the owner occupied market or are consciously delaying entry into the owner occupied sector until they are ready to do so.

At the other end of the demand spectrum there is a significant amount of ‘displaced’ demand from those in housing need who are unable to access housing in the social rented sector. The scale of future demand from this group will largely depend upon policies to expand the supply of affordable housing, primarily the supply of low cost housing, but also social rented housing.

The scale of potential demand highlighted by the Hometrack research will only be realised if the supply of rented housing expands. Despite the major injection of new finance into the private rented sector over recent years, primarily via buy to let mortgages, the supply of rented housing in the UK remains low by international standards.

Donnell commented: "A small rented sector limits job mobility and the development of a dynamic workforce."

"The private rented sector has an important role to play in providing balance to local housing markets. It is certainly delivering much needed supply to those who are currently unable to access the owner occupied sector."

"Yet the scale of investment required can only realistically be delivered via institutional funds. The arrival of Real Estate Investment Trusts (REITs) will provide an important conduit for new investment but we are unlikely to see the required growth in stock without measures to help stimulate the supply of rented housing".