My friends an I recently signed a contract for a 5 bedroom house to rent next year, but there are only 4 of us, so we put out an advert and have shown people the house and it has come down to two people. We haven't decided which one we'll choose yet but obviously we'll have to tell the one we don't that we've chosen the other person; it also turns out they're friends.
I'm going to be the one who tells them that they haven't been chosen and I'm not very good with letting people down without being absolutely brutally honest, I wouldn't have a problem with that but somehow turning around and saying "we liked him/her better" is just a bit too harsh for my liking. So is there something else I could say or a nicer way to say it?

You can be totally honest by simply saying "I'm sorry but we've decided to ask another person to be our roommate. Thank you for your interest"

If the person presses the issue, you can simply add that you felt it was a better "personality fit". No one would want to live with someone they wouldn't get along with so it's completely understandable.

I understand that because these are friends you are going to report back to, you don't want to let them down. And you don't want to lose them as friends over this.
Make sure, before you all decide, that you have clear criteria for who you all choose. Basing your choice on 'who you like better' is not necessarily wise, since all of them are friends.
Then you can say 'someone else was more suitable for the criteria the whole group agreed on'. If this is still 'bad' to say, then I suppose a white lie won't hurt... 'It was a draw and someone else lucked out, sorry'.
This is obviously your challenge to be diplomatically honest. Good luck!