Rent rises 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 the latest analysis by LSL Property Services.
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. 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 per cent, while rents rose 1.6 per cent on the same seasonally adjusted basis. Previously, rents had outpaced wages more than twice over – in 2012 rents rose by 3.2 per cent over the course of twelve months while average regular earnings grew by just 1.3 per cent in the same period.
By contrast, 2014 is set for rent rises of 1.7 per cent over the course of twelve months and average earnings growth of 2.2 per cent over the same period. By July earnings are expected to match annual rent rises, at 1.6 per cent on a seasonally adjusted basis.
The last time ren
ts 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.
David Brown, commercial director of LSL Property Services, comments: “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.
“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. 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.”
Rents as a proportion of earnings
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 per cent of regular earnings, in the latest figures for January 2014. This measure is expected to peak at 38.3 per cent 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 per cent, 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 per cent of gross earnings by some point in 2017 if the forecasted trend continues.
Rent as proportion of earnings after deductions
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 per cent of monthly earnings. This is considerably lower than the peak reached in March 2013, at 48.0 per cent of monthly earnings after deductions, but still considerably higher than the 46.3 per cent 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 per cent of net earnings.
By the end of 2016, monthly rents are forecast to have fallen to 46.7 per cent 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.
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