Tag Archives | housing

Factors that affect the cost of private renting

Readers Question: I was looking for info on housing demand/supply. One area you have no info on is rental trends. There is a lot written about a critical housing shortage in the UK, starting with the Kate Barker review (2004), who took great pains to assure anyone who asked that UK house prices could only go up because of supply/demand fundamentals. None of her projections have been achieved and, if her assumptions were right, there should be an acute housing shortage, evidenced by rising rocketing rental rates, and middle-class homeless, sleeping on the street. Anecdotally, I don’t see any manifestation of exponential inflation of rents eg a 2 bed apartment in the commuter belt outside London attracted rent of c. £1,000 pm in 2002. In ten years that has risen marginally. Why, if there is a critical housing shortage?

The ONS have started a new private housing rental price index – Index of private housing rental at ONS Data only goes back to 2005.

In recent months, there has been a marginal increase in house price rents in UK.

  • In the 12 months to August 2013 private rental prices paid by tenants in Great Britain rose by 1.2%. Private rents in Great Britain excluding London rose by 0.8% during the same period.
  • In the 12 months to August 2013 private rental prices grew by 1.1% in England, 1.3% in Scotland  and 1.3% in Wales.

Index of renting


I used statistics for England rents because the data went furthest back. Data for the UK started later. Source: ONS

This shows a modest rise in the cost of house price rents. A rough calculation suggests an 8-9% rise in rental prices, slightly lower than the rise in the Consumer price index.

House price v rental costs

An interesting comparison is to compare house price inflation with the increase in rental prices.


One very clear feature is that house price inflation is much more volatile than rental prices. Rental inflation, has rarely risen above 2%, House price inflation has reached over 10%, and slumped to -13%

In this period since 2006, house prices have risen by an average of 2.4% . Rental prices have risen by an average of 1.0%

However, it is worth bearing in mind that in the period 2000-2006 house prices were increasing by up to 20% a year.

In a way, it is remarkable, that house prices have risen by an average of 2.4% since 2006 – given the credit crunch, the depth of the recession and espeically when compared to other countries which have had a real housing slump, such as Spain and the US.

UK House prices to rental costs

The Federal Reserve have an interesting graph which shows how house prices in the UK have risen much more substantially than UK private rents, in the period 1996-2008.

house-price-rentingFRB on UK House prices (2008) It was interesting the FRB report suggested ‘Using the price-rent ratio as a guide, (UK) house prices are likely to fall at least a further 30 percent before levelling off.’

Why are rental prices more stable than house prices?

Some factors that could explain why UK house prices have been rising faster than rental prices.

  1. Many tenants have longer term contracts. Landlords may enter into agreements (either formal or informal) to keep rental prices fairly constant. House prices, by contrast, are driven by supply and demand. If more people enter the market for buying a house, it can push prices higher. If house prices rise 20%, it doesn’t mean homeowners will see a 20% rise in the cost of mortgage payments. Most homeowners will be unaffected in the short term by rising house prices. Renters will be affected directly by any change in the cost of rent. Most renters couldn’t afford more a sharp jump in rents.
  2. Rents not affected by interest rates. If interest rates go up, this doesn’t change the cost of renting. But, it might dissuade people from buying a house. Similarly if interest rates fall, landlords will not pass the interest rate cut onto tenants.
  3. Supply more elastic. It is likely that rental properties are slightly  more elastic than houses. If there is greater demand for renting, and the price of renting goes up, it may encourage more landlords to put houses for rent on the market or it may encourage people to let out a room. However, this point is just an assumption – it would need a bit more investigation.
  4. Demand more price elastic for renting. If rents rise in London, it may encourage workers to move elsewhere to find cheaper rents. Renters are more flexible and more price sensitive. If you want to buy a house in a certain area, you’re demand is more likely to be price inelastic. If house prices go up, you may be willing to pay the higher price – you don’t notice a price rise straight away. Higher prices are spread over the 30 years of the mortgage term.
  5. Buying houses as investment. Rising house prices have encouraged more people to buy houses as an investment. This pushes up house prices, but consequently leads to an increase in the supply of rented accommodation. Therefore, you could have a situation where a sharp increase in buy to let activity, pushes up house prices, but decreases rental prices. Evidence suggests the % of homes which are owner occupied has declined in recent years; this could imply an increase in the supply of homes put on the rental market. Continue Reading →

Would a cap on house prices work?

Readers Question: Would a cap on house prices work?

Despite the recession and credit crunch, UK house prices continue to rise. (See: Why are UK house prices so high?) This has caused record levels of house price to income multiples. For homebuyers in London, house prices are approaching a record seven times average earnings. Understandably many feel house prices are already too expensive, and there is a strong case for trying to limit future house price increases.


For example, the Royal Institution of Chartered Surveyors have suggested that the Bank of England impose a cap of 5% a year on house price growth. (Independent link)

Firstly, how would a house price cap work?

The Bank of England cannot influence supply in the short term. Therefore, they would have to influence demand through credit controls (e.g. limiting amount of mortgages) and possibly interest rates. Both have drawbacks and limitations.

1. Interest Rates

In theory, The Bank of England could use interest rates as a tool to influence house prices. A rise in interest rates, in the current climate, would inevitably cause an end to the house price growth as mortgages would become more expensive. Mortgage payments are a large % of disposable income, therefore any change in interest rates will have a significant impact on reducing housing affordability and housing demand.

However, the use of interest rates to control house prices has significant drawbacks.

  1. The main aim of monetary policy is the control of inflation and economic growth. If the Bank is asked to also target house prices, it would mean the Bank of England are placed in a difficult position. To prevent house price rises in London, may require higher interest rates. But, at this stage in the economy cycle, a small increase in interest rates could sniff out the recovery. Interest rates can only achieve so much.
  2. Time lags. A change in interest rates will take time to feed through into the housing market. Ideally, the Bank of England would anticipate house price changes, but in practise this is difficult to do. Few would have predicted the strong rise in house prices in recent years. If the Bank did increase interest rates to affect demand for houses and mortgages, it could easily get it wrong. By, the time mortgage rates rose, house prices may be falling anyway.

2. Mortgage regulation

A more realistic option is for the Bank of England to adopt new regulation which makes mortgage lending scarcer. If house prices are rising too quickly, the Bank of England could introduce controls which limit the availability of mortgages. This could involve insisting on certain size of deposits or limiting the size of income multiples. Continue Reading →


Why are UK house prices so high?

In the past five years, we have had a devastating global credit crunch, the longest and deepest recession since the 1930s (if not worse). Across Europe, we have seen mass unemployment and in countries like Spain, Ireland and Portugal, the housing market has seen up to 50% falls in house prices. Yet, despite this financial and economic upheaval, UK house prices have bucked the trend and avoided a major collapse that many were predicting as the credit crunch hit.

It is true that in the first years of the credit crunch, UK house prices did fall 20%. But, the resilience of house prices in the past few years has been less expected – despite the ongoing weakness of the economy.

According to information from the Land Registry of England and Wales, the annual % change of UK house is nearly 7% (BBC house prices) The average house price is £242,415.

It is perhaps too early to start panicking about another housing bubble. But, what thing is undeniable – UK house prices are very expensive and are close to record levels compared to earnings.

Average selling house prices according to the Nationwide


According to the Nationwide, house prices are still below their 2007 peak, but are close to regaining former ‘bubble levels’


This graph shows that since the 1970s, house prices have risen significantly – even adjusted for inflation.

More worryingly, the ratio of house prices to income continues to remain above long term trends.


Source: ONS mortgage survey 2012

Continue Reading →


UK Housing Market Stats and Graphs

A look at the main UK housing market data.

  1. House prices
  2. Affordability of housing
  3. Interest rates
  4. Supply of housing

House price inflation


Nationwide data

  • The price of a typical UK house increased by 1.1% between May 2012 and May 2013
  • Prices 0.7% lower than one year ago
  • Price of a typical home is £167,912 (June 2013)

UK House prices in past decade


House prices in the post-war period


Continue Reading →


Housing supply in UK

One measure announced in this years budget was government support for mortgages loans. A new Help to Buy scheme will allow people to obtain a 20% interest-free loan from the government, as long as they put down a 5% deposit and buy a newly-built property

However, some have suggested the fundamental problem in the UK housing market is the persistent shortage of housing – and increasing the availability of credit doesn’t directly address this problem. The number of households is forecast to grow by 232,000 a year until 2033, and yet the current rate of home construction is struggling to increase above 100,000 a year.

In 2007 the Government set a target of increasing the supply of housing to 240,000 additional homes per year by 2016. (link) Within this overall target was a commitment to deliver at least 70,000 affordable homes per year by 2010-11, of which 45,000 were to be new social rented homes. However, since the credit crunch of 2008, this target has severely fallen behind as housing construction has slumped.




Source: House building Quarterly Dec 2012

Housing completions have fallen close to 100,000 a year – well below level needed to meet the growth in the number of households.

There is hope improved mortgage availability will increase private sector construction. But, it doesn’t resolve other issues, such as planning regulations and local opposition to building homes on a large scale.

Demand growing faster than supply

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Graph showing that demand for housing stock has been growing faster than net additions to housing stock, pushing up house prices.

source: Understanding supply constraints in UK housing market, Shelter

Forecasts for future number of households

Despite a lack of housing supply, the number of households in England is projected to grow to 27.5 million in 2033, an increase of 5.8 million (27 per cent) over 2008, or 232,000 households per year. (Household projections 2008-2033 – Data.gov)