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).
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