Rent rises in the UK set to be overtaken by wage growth this summer, report suggests

Rent rises in the UK will be overtaken by wage growth in 2014, while disposable income for those in the private rented sector is set to grow for the first whole year since the financial crisis, according to a new report.

The historically significant cross over of earnings growth and rent rises is most likely to take place in figures for July, but could happen as soon as April if wages pick up more quickly than in central forecasts, the latest analysis by LSL Property Services shows.
At the very latest, monthly earnings are expected to be rising more quickly than residential rents by December 2014.

Over the course of 2013 average earnings increased by 1.1%, while rents rose 1.6% on the same seasonally adjusted basis. Previously, rents had outpaced wages more than twice over. In 2012 rents rose by 3.2% over the course of 12 months while average regular earnings grew by just 1.3% in the same period.

By contrast, 2014 is set for rent rises of 1.7% over the course of twelve months and average earnings growth of 2.2% over the same period. By July earnings are expected to match annual rent rises, at 1.6% on a seasonally adjusted basis.

The last time rents rose more slowly than earnings on the same twelve month seasonally adjusted basis was in April 2010, meaning this expected crossover will be the first time regular earnings have outpaced rent rises in at least four years.

‘The longest recession in living memory has been banished to the history books. And this year the squeeze on living standards is finally abating too. Households have withstood half a decade of bombardment from weak earnings, inflation and a general spectre of gloom. We’re still some way from the finish line, but for now things can only get better,’ said David Brown, commercial director of LSL Property Services.

‘As the economic recovery takes hold, there will be plenty of surprises and stumbling blocks. But the cost of rented accommodation is growing at a sustainable rate. The last time rents were rising more slowly than wages was four years ago and that was only due to a rapid dip in rents following the collapse of purchase prices,’ he explained.

‘Today we are in a very different situation. The private rented sector is now powered by waves of investment from landlords and a rejuvenated financial system. Meanwhile every sector of the economy, including construction, appears to be creating jobs,’ he added.

The report also shows that as a proportion of average earnings, rents have been rising since the middle of 2009. However, this trend has moderated considerably in the last twelve months and is expected to reach a turning point imminently.

With one individual earner per household, the typical monthly rent represents 38.2% of regular earnings, in the latest figures for January 2014. This measure is expected to peak at 38.3% in figures for March, before a sustained fall until at least 2016.

Assuming the number of earners per household is constant, this means household finances in the private rented sector overall are set to improve significantly for the first time since 2009.

In July 2009 rents as a proportion of gross earnings reached their lowest point on record at 36.0%, before rising gradually to current levels. This worsening in affordability was caused by both a slight acceleration in rent rises and by slower earnings growth.

In absolute terms, rents will not return to the proportion of gross earnings they reached in 2009 within the forecast period to 2016. Nevertheless it is possible that rents will return to around 36% of gross earnings by some point in 2017 if the forecasted trend continues.

However, as a proportion of net earnings, rents have already fallen from their peak. After tax and other statutory deductions, the average rent represents 47.6% of monthly earnings. This is considerably lower than the peak reached in March 2013, at 48.0% of monthly earnings after deductions, but still considerably higher than the 46.3% low of July 2009.
Rents will continue to fall as a  proportion of net earnings throughout this year and beyond. By the end of 2014 this figure is expected to stand at 47.3% of net earnings. By the end of 2016, monthly rents are forecast to have fallen to 46.7% of wages after deductions, nearing the record low set in 2009. However, this forecast is dependent on an assumption there will be no relevant tax changes after the 2015 general election.

Disposable income is expected to rise in line with falling rents as a proportion of earnings. However, when adjusted for inflation the improvement will be more gradual.

As of January, the average earner living in privately rented accommodation currently has £822 per month remaining after paying tax and rent. Reflecting the squeeze on living standards in the intervening years, this is 6% less than the peak of £874 in such monthly disposable income seen in September 2009, when measured in January 2014 consumer prices.

But the current level of such remaining income is already 0.8% higher than the record low seen in April 2013, when this stood at £815 per month. Moreover, by this measure the level of disposable income for those in the private rented sector is expected to reach £832 per month by the end of 2014, before growing to £844 in December 2015 and £854 by the end of 2016, all at January 2014 prices.

Trends in the relationship between rents and earnings are consistent with recent data from the LSL Tenant Arrears Tracker showing levels of severe tenant arrears down significantly on an annual basis.

As of the first quarter of 2014, the number of UK households owing more than two months rent is 35% lower than in the same period last year, according to the LSL Arrears Tracker. Such tenants in serious rental arrears now represent just 1.4% of all tenancies in the UK, down from 2.3% of all tenancies one year ago.

Meanwhile, according to LSL’s latest Buy to Let Index, overall tenant arrears have fallen since December to stand at the second lowest level on record, with only 6.9% of all rent late or unpaid as of February. This compares with 7.4% of all rent in the previous month and 9.7% in December 2013.

‘For the first time in half a decade people up and down the UK are starting to feel truly optimistic about their finances. And for those living in the private rented sector, that means paying the rent is finally becoming easier,’ said Brown.

‘That said, there is certainly a long way still to go.  And just because we’re going in the right direction, it doesn’t mean we’re already there. Landlords should stay in contact with their tenants on a regular basis. And in the unlikely situation that payment of rent will be late, both parties should be aware of all the options as early as possible,’ he pointed out.

‘However, such a dramatic fall in the level of severe arrears means there are far fewer tenants struggling with their finances on such a fundamental basis. If the risk of unemployment can stay low and wages can fulfil their expected growth, tenant finances will almost certainly continue to improve as we move through 2014,’ he added.