What are the prospects for those who rent their homes?

We often look at what the state of play is regarding UK house prices but I think that it is past time for us to look at those finding themselves singing along with Gwen Guthrie.

Cause ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me
Ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me

Rather oddly if you take Gwen literally you may well live in Kensington and Chelsea.

 Kensington and Chelsea was the least affordable English local authority in 2016 with a median monthly rent making up almost 100% of median monthly salary.

Of course data from there begs all sorts of questions as it is heavily influenced by foreign purchases hence the nickname Chelski. Although it does show that if you work there you are extremely unlikely to be able to afford to  rent from a private source there. For a wider perspective here are the numbers which were produced by the Office for National Statistics last November.

 In 2016, median monthly private rent for England was 27% of median gross monthly salary. This means that someone working in England could expect to spend 27% of their monthly salary on private rent. London, the South East, East of England and the South West, all had percentages above this level. Overall, median monthly private rent as a percentage of median monthly salary ranged from 23% in the North East, to 49% in London.

Some local authorities are particularly cheap in relative terms.

The most affordable local authority was Copeland in the North West (12%) followed by Derby in the East Midlands (18%).

Although in the former case you may have to glow in the dark to get it ( and perhaps save on lighting and heating too).

 Higher median monthly salaries in Copeland are likely to be the result of a large number of relatively high-paid, skilled jobs at the Sellafield nuclear power station in this local authority.

What about social housing?

People also rent via this route and to the question how much? We are told this.

Average weekly cost of social renting for England in 2016 was £97.84, an increase of 2% since 2015. This is a smaller increase than in previous years, although the cost of social renting has risen by 40% since 2008. The average cost of social renting in Wales has increased at a similar rate, by 39% since 2008.

Which in affordability terms translates to this.

Average weekly social rent cost as a percentage of 10th percentile weekly salary in England for 2016 was 31.5%, a decrease of 0.7 percentage points since 2015. This means that someone earning at the lowest 10% of earnings could expect to spend 31.5% of their weekly earnings on social rent. In Wales for the year ending March 2017, weekly social rent cost as a percentage of 10th percentile weekly salary was 28.1%, a decrease of 0.4 percentage points since the year ending March 2016.

It is a shame that we do not get figures which are directly comparable. I take the point that those in social housing tend to have lower incomes as that is of course one of the main reasons they are likely to be there, but not always. On the measuring stick we are presented with it has got more expensive.

Social rent has become less affordable for both England and Wales since 2003. The differences between average weekly social rent costs as a percentage of 10th percentile weekly salary for England and for Wales have been within 2.3 and 3.9 percentage points since 2003.

What is happening now?

The latest official data on private rents is shown below.

Private rental prices paid by tenants in Great Britain rose by 1.1% in the 12 months to January 2018; this is down from 1.2% in December 2017.

That reduction in the rate of growth has been in place for a while now since the peak at 2.7% in the autumn and winter of 2015. This should not be a surprise as rents tend to move with wages and in particular real wages although sometimes there can be quite a lag.I will come to London which is both something of a special case and a leading indicator in a bit but if we exclude it then lagged rents and real wages fit reasonably well in recent times.

Thus in the current scenario with real wages having been falling we would expect lower rental values. This of course is a possible explanation for the rush to include rents ( which of course do not exist) as a measure of owner occupied housing inflation  in the CPIH. If you were wondering why it gives a lower answer that is it.

What about London?

The official data tells us that it has a different picture to the rest of the UK.

London private rental prices grew by 0.2% in the 12 months to January 2018, that is, 0.9 percentage points below the Great Britain 12-month growth rate.

So it has been pulling the rate of growth lower and there should be “no surprises” as Radiohead would put it about that if we look at the numbers earlier in this article.

Actually others think that the situation is even more different in London.

Average rental values in prime central London fell 2.1 per cent in the year to February according to Knight Frank – and the letting agency says rents in that area have been dropping now for two full years. ( Letting Agent Today).

Fascinatingly we are told this by Knight Frank.

“As new supply moderates and demand strengthens, we expect to see continued upwards pressure on rental values” claims the agency.”

Continued? Anyway we have of course seen if we are polite what might be called over optimism before. This is me quoting the Financial Times on the 4th of November 2016.

Rents in Britain will rise steeply during the next five years as a government campaign against buy-to-let investing constrains supply, estate agencies have forecast.

Actually it got worse.

London tenants face a 25 per cent increase to their rents during the next five years, said Savills, the listed estate agency group. Renters elsewhere in the country will not fare much better, it said, with a predicted 19 per cent rise.

I was far from convinced.

 We know that lower real incomes are correlated and usually strongly correlated with rents which means that a reduction in the rises and maybe some falls are on the horizon (2019 or so if my logic holds).

Comment

As we survey the situation we see a complex picture but a theme is that things have been getting tougher for many. I wonder how much worse things look for younger renters as for example even if the numbers above are the same some of them have student loans to repay? Another cautionary note can be provided by the official data which is far from complete and some statisticians think may be too low by around 1% per annum due to its flawed nature.

If we look ahead then the general trend is as I pointed out in November 2016 but as this year progresses there will be winds of change. There are ever more surveys suggesting a pick-up in wage growth but even if understandable caution is applied here due to element of deja vu inflation should fall back meaning real wages will stop falling and then should rise. After a lag that should affect rents.

Meanwhile I would like to remind you that the UK statistics establishment uses the rental data it knows is far from complete to measure owner-occupied housing inflation. This morning they have decided that a fantasy number based on troubled data is better than this.

this means that the RPI is heavily influenced by house prices and interest rates,

Not everyone is convinced this is a bad idea.

 

Me on Core Finance

 

 

 

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17 thoughts on “What are the prospects for those who rent their homes?

  1. So the government borrows money(and pays interest on it) to subsidise an overpriced and overvalued sector, caused by the Bank of England keeping rates artificially low for too long.

    If rents reflected the below subsistence(and falling)wages of the average renter more accurately, the economy could be re-balanced, but everything the government does perpetuates the current rentier system.

    As long as people keep voting Tory and Labour, things will never change.

    • Hi Kevin

      The situation just goes on and on and the last thing those in charge want is change. Rentiers looking at yield need to keep trying to charge more otherwise in places like London they would be better off buying a UK Gilt. They would also have to admit it is all about the ( expected) capital gain.

    • Worth noting the way that housing benefit paid to people (especially on tax credits) causes the prevents local wages from naturally constraining rents.

  2. If anyone wants to do an inflation guesstimation I rented a reasonably-sized bedsit (remember those ?) on Kensington Church Street for about £10 per week back in the mid-1970s…

    • Hi arrbee

      I was in the process of using the housing section of the RPI to calculate this but sadly the data only goes back to 1987 on the ONS website. I have however found the data for the RPI itself. The average for 1975 was 134.8 which for younger readers is an example of how inflation raged back then as it had been set at 100 at the beginning of 1974. You would now be paying £74 per week or more precisely at the end of last year. Because inflation was high then it matters exactly what year but even if we make it £100 per week well………

      Any luck?

      • A quick search shows a typical price for a “double bed” room in a shared flat or house in Kensington to be something around £180 to £200 per week now. Back in 1976 my £10 per week represented ~20% of gross pay for a graduate starter, so to get the same ratio now implies a starting salary ~£45000. My guess is that the proportion of 21/22 years olds renting in Kensington has declined since the 1970s.

  3. If you’re going to have a service economy that is reliant on the consumer having money in his pocket to buy pizza, gadgets, coffee and such like the best thing you can do for them is whacking up house prices and rent until the pips squeeze so they haven’t got any money to buy pizza, gadgets, coffee and such like …. Is what seems to be successive govt policy.

      • If thats the case raise rates which will crash the property market then the over leveraged can feel happy renting when they’re made bankrupt.

        She gets worse by the day, she really is a great advert that women should not be promoted just for being women.

        • I think she was promoted because she didn’t really voice an opinion over Brexit.

          Safe pair of hands Arthur.

          Clearly Putin scared witless of her and her willingness to ban politicians from travelling with England to the World Cup

  4. Hi Shaun I always thought the housing market would suffer a significant correction due to the next generation being saddled with student debt and falling remuneration.
    So far I have been wrong as I underestimated the foolishness of people to take out unimaginable amounts of debt,and the Banksters being aided and abetted by the politicians and their market propping help to buy ….similar to a great white shark shouting to bathers come on in the waters lovely.
    The rental market needs to be controlled by council housing and housing associations private landlords need to be squeezed out the buy to let market destroyed and the almost 1 million empty properties utilised.
    Equilibrium needs to be restored to housing this can only be brought about by effective governance of housing private and the rented sector in order that people have affordable options to buy or rent without being subject to extortion rackets by Banksters inflating housing bubbles or racketeer landlords.

    • Hi PrivateFraser

      I was thinking along similar lines to your point as I was listening to Mario Draghi at the ECB press conference earlier. If we skip the ease with which he swats the press corps aside the issue is if they get out of negative interest-rates and how far before the next recession hits. When it does we know what they will do and that will of course set the home (prices) fires burning again, It is like an addiction….

  5. It makes me laugh when you see the estate agents warning that rents will have to rise or tenants will be on the streets.No consideration.No real understanding that wages are a constaining factor and no apparent realisation that they’re implicitly saying landlords will rather suffer voids than low rents.

    Never has an industry been as in need of regulation.

    • I meant to add of course that said EA’s also don’t seem to accpet the possibility that a firesale could lead to price drops and a rise in owner occupiers.

  6. “The situation just goes on and on and the last thing those in charge want is change.”

    I don’t know. There are clearly elements in the Tory Party starting to stress about becoming the natural Party of Opposition as the country lurches away from the “homeowning democracy” model. I fear they may be too late, as sections of their Party (landlords are themselves natural allies and donors) fight any change. Osborne did make some changes but they are quite slow moving in their effect.

    If the Tories are too late and Labour assumes power, they will likely want to enhance the staus quo where an electoral majority own nothing and earn little in order to maintain their own power, whilst subsidising the system by taxing higher earners to ‘help with high rents’ (but go directly to landlords) and ‘help with low pay’ (tax credits for the burgeoning low value added ‘gang master’ economy that goes a long way to explaining the ‘productivity puzzle’ ).

    Think this is mad? Well, just ask yourself about all those tirades against ‘Lords’ and ‘Toffs’, yet for decades Labour never reformed it, even though they had ample opportunity under many Prime Ministers and governments. If they were to do away with it, they would lose an easy target of derision. Tony Blair tinkered but only to the extent that he turned it into a hand picked unelected chamber for people in his own image. And the person put in charge of the Committee for selecting ‘good eggs’ went on to help blow up Halifax/BoS (and Lloyds) with their ambitions of leveraging the Halifax’s relatively safe mortgage book, in order to pile into commercial property and Ireland, via the disaster that was Bank of Scotland (it was their Edinburgh Mound-based competitive instincts that did for both BoS and RBS and the country as a whole of course).

  7. Dammit, a blog written just for me (in my ego at least) and I arrive here at the ungodly hour of 01.35 in the morning, needless to say very grumpy! This illustrates very well the state failure to provide a ceiling for rents by replacing sold off council stock.

    Excessive rents a a major drag on economic activity because as Gwen says, if there ain’t nothing goin’ on but the rent a Rentier is getting rich instead of the shop keeper. Great article, thanks Shaun.

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