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

private-rental-price-england

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.

rental-house-price-inflation

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 especially 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-renting FRB 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.

housing

UK House prices

uk-house-prices-2001-2013q2

UK House prices since 2002

Regional cost of renting

The most expensive places to rent in UK

Local authority name All monthly rents
Kensington and Chelsea 2,492
Westminster 2,318
City of London 2,145
Camden 1,885
Islington 1,733
Hackney 1,690
Hammersmith and Fulham 1,668
Tower Hamlets 1,647
Wandsworth 1,647
Richmond upon Thames 1,595
Lambeth 1,560
Brent 1,510
Southwark 1,473
Merton 1,450
Haringey 1,400
Barnet 1,400
Hounslow 1,400
Ealing 1,395
Harrow 1,350
Newham 1,325
Greenwich 1,300
Kingston upon Thames 1,295
Elmbridge 1,295
South Bucks 1,275
Lewisham 1,250
Enfield 1,250
Chiltern 1,250
Epsom and Ewell 1,250
Waltham Forest 1,225
Guildford 1,225
Hertsmere 1,200
Three Rivers 1,200
Redbridge 1,200
Windsor and Maidenhead 1,200
Tandridge 1,200
St Albans 1,195
Bromley 1,195
Sevenoaks 1,175
Mole Valley 1,175
Woking 1,175
Runnymede 1,173
Barking and Dagenham 1,150
Hillingdon 1,150
Oxford 1,150
Cambridge 1,100
Brentwood 1,100
Epping Forest 1,100
Croydon 1,100
Sutton 1,100
Brighton and Hove 1,100
Wokingham 1,100
Spelthorne 1,100
Watford 1,050
Welwyn Hatfield 1,050
Reigate and Banstead 1,050
Waverley 1,050
Surrey Heath 1,025
Bexley 1,000
Havering 1,000
Dacorum 975
Hart 975
Winchester 975
Bracknell Forest 950
Wycombe 950
Tonbridge and Malling 950
South Oxfordshire 950
Horsham 950
Mid Sussex 950
Bath and North East Somerset 940
Broxbourne 925
East Hertfordshire 925
Reading 925
Crawley 925
Forest Heath 923
Uttlesford 900
Lewes 900
Tunbridge Wells 900
Vale of White Horse 900
Chichester 895
South Cambridgeshire 885
West Berkshire 880
Rochford 875
Basingstoke and Deane 860
Thurrock 850
Basildon 850
Chelmsford 850
North Hertfordshire 850
Slough 850
Test Valley 850
Canterbury 850
Cherwell 850
West Oxfordshire 850
Bristol, City of 850
Dartford 848
Cotswold 845
Rushmoor 828
Castle Point 825
Harlow 825
Milton Keynes 825
Aylesbury Vale 825
Wealden 825
Adur 825
Christchurch 825
East Dorset 825
Central Bedfordshire 807
South Northamptonshire 800
East Hampshire 800
Eastleigh 800
New Forest 800
South Gloucestershire 800
Stevenage 795
Fareham 795
Maidstone 795
Havant 785
Warwick 775
Poole 765
Trafford 750
Stratford-on-Avon 750
Solihull 750
Bedford 750
Luton 750
Southend-on-Sea 750
East Cambridgeshire 750
Braintree 750
Maldon 750
Southampton 750
Gravesham 750
Arun 750
Purbeck 750
Exeter 745
Worthing 740
St Edmundsbury 725
Medway 725
Ashford 725
Wiltshire 725
South Hams 725
Isles of Scilly 723
Tewkesbury 715
West Dorset 710
York 700
Harrogate 700
Portsmouth 700
Rother 700
Huntingdonshire 695
Colchester 695
Bournemouth 695
Cheltenham 695
Swale 678
Gosport 677
Rutland 675
Swindon 675
Stroud 675
East Devon 670
Babergh 665
Daventry 660
Manchester 650
Stockport 650
Harborough 650
Rugby 650
Birmingham 650
Bromsgrove 650
Wychavon 650
Tendring 650
Broadland 650
Mid Suffolk 650
Eastbourne 650
Cornwall 650
North Somerset 650
Teignbridge 650
North Dorset 650
Northampton 640
Lichfield 635
Derbyshire Dales 625
Blaby 625
Oadby and Wigston 625
East Northamptonshire 625
South Staffordshire 625
Malvern Hills 625
South Norfolk 625
Suffolk Coastal 625
Weymouth and Portland 625
Mendip 625
Redditch 620
Norwich 610
Newcastle upon Tyne 600
Cheshire West and Chester 600
South Lakeland 600
Leeds 600
Breckland 600
Isle of Wight 600
Thanet 600
Mid Devon 600
South Somerset 600
Taunton Deane 600
West Devon 598
Cheshire East 595
Ribble Valley 595
Wellingborough 595
Rushcliffe 595
Tamworth 595
North Warwickshire 595
Worcester 595
Ipswich 595
North Devon 595
Forest of Dean 595
Gloucester 590
Salford 575
Hambleton 575
North West Leicestershire 575
Boston 575
South Holland 575
Kettering 575
Stafford 575
Coventry 575
Peterborough 575
North Norfolk 575
Sedgemoor 575
Herefordshire, County of 570
Torridge 570
Shepway 569
North Kesteven 565
South Kesteven 565
Dover 565
Corby 563
Torbay 563
Melton 560
Fenland 560
Warrington 550
Bury 550
Fylde 550
South Ribble 550
Craven 550
Richmondshire 550
Ryedale 550
Selby 550
Sheffield 550
South Derbyshire 550
Hinckley and Bosworth 550
Broxtowe 550
Gedling 550
Shropshire 550
Telford and Wrekin 550
Hastings 550
Plymouth 550
Knowsley 544
Wyre 542
Wyre Forest 540
Nuneaton and Bedworth 535
Stockton-on-Tees 525
Eden 525
Chorley 525
Lancaster 525
Sefton 525
North East Derbyshire 525
Charnwood 525
East Staffordshire 525
Dudley 525
Sandwell 525
Great Yarmouth 525
Waveney 525
Blackpool 520
West Lancashire 520
Nottingham 515
Cannock Chase 515
North Tyneside 510
Gateshead 500
Halton 500
Tameside 500
Preston 500
Wirral 500
Wakefield 500
Leicester 500
High Peak 500
Lincoln 500
Newark and Sherwood 500
Walsall 500
Wolverhampton 500
Newcastle-under-Lyme 499
Redcar and Cleveland 495
Sunderland 495
Bolton 495
Oldham 495
East Riding of Yorkshire 495
Scarborough 495
Amber Valley 495
Staffordshire Moorlands 495
West Lindsey 480
Erewash 476
Northumberland 475
South Tyneside 475
Allerdale 475
Rossendale 475
St. Helens 475
North Lincolnshire 475
Doncaster 475
Rotherham 475
Bradford 475
Calderdale 475
Kirklees 475
Derby 475
Chesterfield 475
East Lindsey 475
Ashfield 475
Bassetlaw 475
Mansfield 475
Rochdale 465
County Durham 450
Hartlepool 450
Middlesbrough 450
Blackburn with Darwen 450
Barrow-in-Furness 450
Carlisle 450
Copeland 450
Wigan 450
Liverpool 450
Darlington 440
Stoke-on-Trent 440
North East Lincolnshire 435
Barnsley 433
Hyndburn 425
Pendle 425
Bolsover 425
Burnley 400
Kingston upon Hull, City of 395
West Somerset 600

Source: ONS Housing Summary 2017

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