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This quarter’s report reveals that the increase in private rents is failing to keep pace with growth in average weekly earnings. This means the affordability of renting has improved over the last three years, with rents rising at half the rate of average UK earnings growth (up +4% annually). This report forms part of a new rental series that accurately tracks the changes in achieved rents over time.
Headline UK rental growth and impact of London
The annual rate of UK rental growth for new lets is +2.0% -the highest rate for 3 years (Sep-2016). Growth has increased from a low of 0.5% in June 2017 as a result of 1) a tightening in rental supply as a result of tax changes and fewer investment buyers, 2) rising levels of employment and 3) affordability constraints limiting access to home ownership in southern England which supports underlying rental demand.
Average earnings are growing at +4.0%, twice as fast as the growth in UK rents (Fig.4). Earnings have been rising faster than rents for 3 years now, improving rental affordability.
London is the UK’s largest rental market with c.30% of rental supply. The size and scale of the London market influences the headline UK growth rate over time. Fig.2 compares rental growth for the UK including and excluding London. The headline UK rate was inflated between 2010-2012 as a result of London rents increasing by 8-10% as employment and in-migration into London grew. Rental growth in London over 2016 and 2017 has been negative, acting as a drag on the headline rate. The UK ex. London series has tracked earnings growth until 2016 and has run below earnings growth for the last 2 years.
UK rental growth – longer run context
UK rental growth is running just below the 10-year average (2.3%). The increase in rental growth has been modest by recent standards – rental growth accelerated over 2007 and then fell between 2008 and 2010.
While the rental market is viewed as ‘contra-cyclical’ (i.e. rental demand increases as the sales market weakens), increased unemployment over 2008-2010, reduced the pool of demand for renting while available supply expanded (Fig.2) as households rented out property they could not sell, creating a downward pressure on rents over 2009.
The stock of private rented homes has grown faster than owner occupied housing over the last 15 years. This is down to continued new investment by private landlords (Fig.2). Tax and policy changes have shifted the market dynamics for private investors since 2016. This has led to a decline in new investment and some disposals which has led to a tightening in private rental supply.
Rental growth and rent levels – regions and countries
Rental growth at a country level is +1.9% in Wales, +1.8% in Northern Ireland, +2.0% in England and +2.9% in Scotland.
Rental growth across English regions ranges from +0.5% in the North East to +3.2% in the East Midlands. Rental growth in the West Midlands has slowed the most compared to the 5-year annual average as demand for rented homes has weakened as the sales market, and demand from first time buyers (FTBs) has strengthened – survey data shows that c.80% of FTBs are private renters.
Rental growth in London has been the second weakest, after the North East, over the last 5 years and the pace of growth has increased after a prolonged period of weakness.Fig.11 - 20 cities with most affordable rental markets
Rental affordability – single earner – 40 UK cities
Rental affordability – for a single earner - varies widely across UK cities from a low of 19% in Hull to 44% in London City (a larger area than London Region.
There is no official definition for a sustainable level of rental affordability, the latest English Housing Survey shows that private renters spent 32% of gross income on rent.
Where rental affordability is elevated this reflects a mix of 1) strong or a large labour market where growth in employment has been faster than the growth in housing supply, 2) higher capital values and a higher income to access home ownership which increases underlying demand for renting and 3) student populations elevating demand levels.
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