In our latest property market insight report, we explore rental affordability by region, historic trends in the rental markets, and the close relationship between earnings and rental growth.
The rental sector has grown over the last decade, with private rents increasing to different degrees across local housing markets, but do the regional trends we see in the residential sales market mirror that of our rental market?
Rental affordability at a national level is currently in line with the 10 year average of 30% net earnings spend on rent
Rents are set to continue to rise in line with earnings (c3% per annum) over the next few years
Demand for rented housing will remain strongest in London and the South East where barriers to homeownership are the greatest
Rents in the northerns regions of England are the most affordable for a decade
The occupancy level of rented housing is an important factor for rental growth, affordability analysis and drawing conclusions over the outlook for rental growth
Relationship between rents and earnings
On average, 30% of net earnings is spent on rent today. This is in line with the average over the last decade. Tenants can only afford to allocate a certain proportion of their earnings to rent, so there’s a close relationship between affordability and earnings.
Stretched affordability and slower employment growth have kept London rental prices close to 2014 levels, demonstrating that earnings have an important part to play in rent control. This means landlords cannot control rental prices, as rental levels are a function of earnings growth.
Although this may seem like bad news for landlords, property remains an attractive investment to those looking for assets that can match liabilities linked to earnings growth or inflation.
London and the South East have experienced weaker growth over the past 2-3 years. This is down to stretched affordability, slower employment growth and, more recently, weaker in-migration.
Despite affordability being stretched (comparatively to the rest of Great Britain), it has in fact improved over the last three years. Earnings have increased, while rents have been going down, naturally regulating affordability.
The Midlands, Wales and the North
Rental growth in the Midlands and Wales has outpaced most of the rest of the UK — with growth between 17% and 20%. Conversely, growth in the northern regions averaged just 3% between Q4 2007 and Q4 2018.
Despite vast differences in rental growth across Great Britain, affordability is manageable across all regions.
Affordability across Great Britain
At a national average, rent as a proportion of earnings has tracked between 28% and 32%. There is potential for further rental growth in regional markets where affordability remains attractive and levels of employment are rising. Affordability is more of a constraint to the rental growth in southern England although the high cost of home ownership will continue to support rental demand and limit any downward pressure on rental growth.