Average rents in London are forecast to fall by 1% to 2% in 2017 while those in the rest of England and Wales are predicted to rise by 2% to 3%, according to the latest analysis.
Rental growth is expected to be best in the Midlands and East of England where rents are currently increasing at close to 5% per annum, according to the report from Hometrack.
It points out that residential rental growth over the last decade has ranged from 45% to -7% across regions and the variance is largely explained by local economic factors and rents have tracked earnings over the long run.
Rental affordability is worst in London while it is the best for a decade in regions outside southern England and while demand for rented housing has grown, the impact on rents varies widely.
Looking at average asking rents from 2004 onwards across England and Wales the analysis shows that rents fell between 6% and 12% during the global financial crisis as accidental landlord’s boosted supply while falling employment weakened demand.
Since 2010 rental growth at a national level, outside London, has largely tracked the growth in average earnings with the growth in rents averaging 2.7% per annum.
London has recorded higher levels of rental growth since 2010 averaging 4.5% per annum with periods of weaker inflation in 2013 and now in 2017. Strong employment growth in London over this time, two to three times faster than other regions, has increased rental demand.
In addition, high house prices and tighter mortgage regulation have made it harder for first time buyers to transition from renting to buying, further sustaining demand for rented housing, the report explains.
In the last decade in context, while rents have increased by 45% in London and over 20% in southern regions, rents elsewhere have been broadly flat in nominal terms with weaker growth in employment and earnings failing to offset the fall in rents recorded in 2008/2009.
At the national level rental affordability has been broadly stable over the long run with rents accounting for between 27% and 32% of gross annual earnings over the last 12 years. The report says this is not surprising as tenants can only allocate a certain percentage of earnings towards housing costs. This feature of the market makes investing in housing attractive for those seeking an asset where the underlying performance is linked to earnings growth.
When it comes to rental affordability, there are clear differences across the country with Wales, the Midlands and Northern regions having the most attractive affordability in contrast to stretched affordability levels in London.
The report points out that it is not surprising that rental growth in London has slowed to 0.4%. Outside London rental growth is running at 3.1%.
Looking ahead the report says that there is likely to be a tightening in rental supply in the next 12 months to support rent levels, primarily in London. Higher levels of stamp duty and changes to tax relief for landlords have reduced new purchases, with buy to let borrowing down 30% on 2015 levels. In contrast, it predicts that rental growth outside London will continue to track earnings growth.
