"Another important factor is the growth in sharing amongst renters which means in many parts of London there are multiple incomes combining to pay the rent"
Since 2007 average rental values in the capital have increased by 45%, which has coincided with increased demand due to strong growth in employment, inward migration from the rest of the UK and overseas, as well as constraints in the accessibility of mortgages for first-time buyers.
In stark contrast to London, and other areas of southern England, rental growth elsewhere has been broadly flat over the past decade. In Yorkshire and Humberside average rents have remained stagnant, while in the North West and North East rents have fallen by -7% and 4%.
The reason for this difference is that jobs growth after the financial crisis – when rents fell between 5% and 12% as accidental landlords boosted supply and falling employment weakened demand – has been 2-3x faster in London.
Rental growth in the capital, which has averaged 4.5% per annum since 2010, has rapidly outpaced earnings leading to the current levels of unaffordability. Conversely, annual rental growth at a national level, excluding London, has been averaging just 2.7% per annum and largely tracked the growth in average earnings.
However, in southern parts of England and the Midlands rental growth has started to outpace earnings from 2013 onwards as economic conditions improved. This recent shift has led to an overall 20% increase in average rental values in these regions since 2007.
Richard Donnell, Insight Director at Hometrack says: “This new report aims to provide an important long run context for the current trends in rents and rental affordability and what this means as we look forward. Rents fell by between 5% and 12% in 2008/09 and this explains why rents in parts of the country outside of London, where rental growth has been subdued, are only just back to where they were a decade ago.
London has the largest and most liquid rental market. Demand in the capital has been buoyed by employment levels rising 2-3x times faster than other regions, as well as the much higher deposit and household income required to buy making the transition from renting harder than in the past.
Donnell continues: “Another important factor is the growth in sharing amongst renters which means in many parts of London there are multiple incomes combining to pay the rent. This is a particularly strong trend in in inner London where a high percentage of rented homes are fully occupied.
Outside London the drivers of rental demand have been more muted and the resulting impact on rents is less pronounced. However, increased economic activity is feeding into demand and resulting in increased levels of rental growth, at a rate more in line with earnings growth.
Our analysis shows that over the long run tenants spend between 32% and 37% of earnings on rent at a national level.
Donnell concludes: “Ultimately rental levels need to reflect affordability and the buying power of tenants. In London affordability is stretched and demand is weakening on concerns over the outlook, which we expect will lead to average rents in the capital falling by 1-2% over 2017. Conversely, rental growth outside of London is set to continue to track earnings growth with rents rising at 2-3% per annum. The greatest upside for rents is in the midlands and northern regions where rental affordability is the best it has been for a decade.”
