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Rental growth has varied widely over the last decade from flat to growth of over 45%. Rental affordability is the most stretched in London while in the regions the affordability of renting is the best for a decade.
Where next for private rents?
The stock of private rented homes has grown by 1.1m (31%) since the global financial crisis. Demand for rented housing has also grown but the impact on rents varies widely. This paper examines the long run trends in rental growth and affordability and considers the near term outlook.
Hometrack rental index reveals long run trends
Hometrack’s regional rental indices track average asking rents from 2004 onwards across England and Wales. Figure 1 plots year on year growth in rents and average earnings over this period. The chart shows two rental series – one for London and the second for England and Wales (E&W) excluding London.
Rents fell between 2008 and 2010
Rents fell between 6 and 12% during the global financial crisis as accidental landlord’s boosted supply while falling employment weakened demand. Since 2010 rental growth at a national level, outside London, has largely tracked the growth in average earnings with the growth in rents averaging 2.7% per annum.
Strong demand drives out-performance in London
London has recorded higher levels of rental growth since 2010 averaging 4.5% per annum with periods of weaker inflation in 2013 and now in 2017. Strong employment growth in London over this time, 2-3x faster than other regions, has increased rental demand. In addition, high house prices and tighter mortgage regulation have made it harder for first time buyers to transition from renting to buying, further sustaining demand for rented housing.
Wide variation in rental growth over last decade
Figure 2 puts the change in rents over the last decade in context. While rents have increased by 45% in London, and over 20% in southern regions, rents elsewhere have been broadly flat in nominal terms with weaker growth in employment and earnings failing to offset the fall in rents recorded in 2008/9.
Rents track earnings over the long run
At the national level rental affordability has been broadly stable over the long run with rents accounting for between 27% and 32% of gross annual earnings over the last 12 years (figure 3). This is not surprising as tenants can only allocate a certain percentage of earnings towards housing costs. This feature of the market makes investing in housing attractive for those seeking an asset where the underlying performance is linked to earnings growth.
Affordability impacted by varying occupancy levels
Our analysis of affordability makes allowance for differing levels of occupancy for rented housing i.e. more than one earner per rented home. In markets with the greatest demand pressures levels of occupancy are higher. This is one reason why rental growth in London has run at close to 5% per annum in recent years. Census data shows that 60% of 2 bed private rented homes in London are ‘fully occupied’ compared to 32% for owner occupied property.
Diverse profile of rental affordability across regions
Figure 4 plots the annual trend in rental affordability by region between 2005 and 2016. The relative differences across the country are clear with Wales, the Midlands and Northern regions having the most attractive affordability in contrast to stretched affordability levels in London. It is not surprising that rental growth in London has slowed to 0.4%. Outside London rental growth is running at 3.1%.Fig.4 - Regional affordability - annual averages 2005-2016
Rents in London to post small falls in 2017
We expect average rents in London to fall over 2017 by 1-2% on stretched affordability and slower jobs growth. We expect a tightening in rental supply in the next 12 months to support rent levels, primarily in London. Higher levels of stamp duty and changes to tax relief for landlords have reduced new purchases, with buy to let borrowing down 30% on 2015 levels.
Rental growth to run at 2-3% pa outside London
In contrast, we expect rental growth outside London to continue to track earnings growth with rents rising at 2-3% per annum. Rental growth looks set to outperform in the Midlands and Eastern regions where rents are currently increasing at close to 5% per annum.
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