How much of your earnings go on rent?

Dataloft regularly analyse mortgage affordability and how much of our earnings are typically spent on meeting mortgage payments. Mortgage affordability tells us a lot about the future direction of the housing market and housing demand.

But how much do households typically spend on rent? And what does it tell us? With more and more of us renting – in England alone there are now over 4 million households in the private rental sector, up 75% on 10 years ago – and rental sector on track to continue to grow substantially, this is an important question.

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Across 63 of our largest towns and cities across the whole of the UK our figures show households are currently spending 26% of gross earnings on rent.

This is interesting as large scale professional landlords often cite 30% affordability as a rough rule of thumb for rental affordability. So too Sadiq Khan’s plans for affordable rents in London. His concept of a ‘London Living Rent’ for middle earners will set rents at a third of local median household earnings.

There is of course regional variation. In the most affordable locations – Barnsley, Derby and Hull – rent accounts for just 15% of household earnings.

At the other end of the spectrum, Londoners spend much more of their earnings on rent, so too renters in Brighton and Oxford. In each of these locations renting will take over 47% of household earnings.

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What this analysis means for investors? For landlords there is a trade-off between maximising rents and maintaining a secure income stream.

There is an upper limit to rental affordability and landlords won’t easily be able to drive rental growth higher in areas where rental affordability is already stretched. Tenant demand will vary according to affordability as tenants, who have more flexibility than homeowners, will move to lower cost locations within a town or to a new location entirely.

In some cases reining back rental expectations will help limit the risk of a default on rent and avoid the subsequent costs of recovering unpaid rent, as well as ensure a good level of demand when the tenant moves on.

Supply is, as ever for the UK housing market, the crux of the issue. In markets where rental affordability is stretched, this typically relates to an undersupply of properties in the right tenure or right affordability range.

With the portion of households in the private rental sector rapidly climbing, we believe rental affordability deserves as much discussion as mortgage affordability. Watch this space.