The growth of the private rental market has invited considerable speculation surrounding its causes and consequences. One key driver is the decreasing affordability of owner occupation, illustrated in Figure 1. In 1977, homes cost on average three times the median household income, but by 2013, homes cost 10.5 times median household incomes, making home ownership three times as expensive as in 1977.
The declining affordability of home ownership restricts many households to the private rented sector, and over the past 15 years, the number of people living in privately rented properties has increased considerably. This proportion nearly doubled from 8.8 per cent in 2001 to 15.4 per cent of all English and Welsh households in 2011, and by 2013-14 comprised 19.4 per cent or 4.4 million households in England. Alongside the declining affordability of home ownership are reports that the private rented sector is also becoming more expensive, placing pressure on household finances and potentially restricting these households’ ability to save for home ownership. However, our understanding of the affordability of the private rented sector is severely hampered by issues of data availability and quality.
Figure 2 illustrates the prices of private rented properties using data from private landlords collected by ONS. Nominal private rental prices in England increased by 11 per cent between 2005 and 2015, and these rises were larger in London (18 per cent) than outside London (7 per cent). These figures adjust for changes in composition and quality, so do not reflect changes in the condition or type of private rental properties. Figure 3 similarly shows average private rents using data from the English Housing Survey. Average private rents increased from £153 per week in 2008-09 to £176 in 2013- 14. While both sources suggest large increases in private rental costs over the last 10 years, they do not account for inflation or income changes. We attempt to do this in Figures 4 and 5.
To provide a measure of affordability, Figure 4 presents mean weekly private rental prices from the English Housing Survey (blue line) and mean household incomes (orange line) between 2008-09 and 2013-14. Rental costs have been adjusted for inflation using the Consumer Price Index, which accounts for changing costs-of-living and means that rental costs should be comparable between years. Likewise, household incomes are expressed in 2013-14 prices to allow like-for-like comparisons to be made. The two lines are nearly parallel, with households spending 30 to 31 per cent of their weekly incomes on housing over this period. This close correspondence between private rental prices and household incomes suggests that – contrary to widespread belief – that affordability in the private rented sector in England has not changed over this period.
Figure 5 similarly plots mean weekly rental costs as a proportion of mean household incomes between 2010-11 and 2013-14. Mean rental costs ranged from 40 to 43 per cent (including housing benefit) and 47 to 52 per cent (excluding housing benefit). Consistent with Figure 4, these figures suggest little change in affordability in the private rented sector, although this provides an assessment of affordability over a short period only.
It should also be noted that these figures are based on mean household incomes in England. A larger proportion of people in the lowest than the highest income quintile (23 and 13 per cent in 2013-14) are private renters, which means that private rental affordability for some groups is likely to be lower than suggested in Figures 4 and 5. Unfortunately, data availability means that it is not possible to examine affordability at specific points across the income distribution or explore more detailed changes over time.
So what should we conclude? The possibility that affordability in the private sector is unchanged over recent years has both positive and negative consequences. In the context of the rising size of the private rental sector, it is no doubt encouraging that affordability in this sector has remained stable. Despite this, there remain some potentially serious consequences of overall trends in housing affordability in England. Private renters spend considerably more on housing costs: in 2013-14, housing costs accounted for 34 per cent of their incomes for private renters, compared with 29 per cent among social renters and 18 per cent among those with a mortgage. This is likely to exert other pressures on household budgets and may place private rented households at an elevated risk of poverty. Private renting is also less stable than the other tenures, with potentially traumatic consequences: the end of a shorthold tenancy was cited by 29.5 per cent of households accepted as homeless in the first half of 2015. Therefore, while the apparent crisis in rental prices appears less extreme than might be believed, there are still potentially negative consequences to the current housing market in England.
Post by Beth Garratt 22nd Feb 2016. Download the briefing note here.