Spotlight on Investing in Rental Britain takes an in-depth look at Britain's rental market and also features an exclusive survey 'What Tenants Want'. Download here.

The private rented sector is growing dramatically. Between 2001 and 2011 the number of households renting privately rose in the UK by 2 million to 4.3 million. Though still the tenure of choice, homeownership is shrinking.

This structural shift in the housing market, which started in the early noughties and pre-dates the credit crunch, is set to remain. Savills expects the private rented sector to swell by about 200,000 households a year over the medium term. We estimate that by 2018, one in five households, a total of 5.7 million in England, will be renting in the private sector, despite recent Government measures to boost homeownership.

Help to Buy may encourage more buyers onto and up the property ladder in the short-term but it will not change the direction of the market. Key drivers point to continued demand for private renting in the long-term.

Affordability

Homes are expensive relative to average earnings as incomes have not kept pace with house price inflation. Back in 2001, median house prices in England and Wales were 4.5 times median earnings. Today prices are 6.7 times earnings.

Despite the effects of Funding for Lending, which has helped increase the availability of mortgages at higher loan-to-values, buyers still need large deposits. The average first time buyer requires a deposit of £27,000 equivalent to 77% of their income. In London, the average first-time buyers must save £63,000.

The cost of monthly mortgage payments is another barrier. Banks’ more cautious approach to lending means interest-only loans are now rare. Paying off the capital as well as the interest, makes the average mortgage more expensive to service than paying rent. This cost can only rise.

According to the Governor of the Bank of England’s forward guidance policy, base rates are unlikely to rise before late 2016. But even a small rise in rates will make a substantial difference to stretched borrowers.

Demographic pressure

Despite the weak economy, the laws of supply and demand have driven strong rental growth over the last few years. Population growth adds pressure to the shortage. Projections by the Town and Country Planning Association (TCPA ) predicts that the number of households in England is set to rise by a fifth in the next 20 years to 27 million, creating a demand for some 245,000 homes a year.

Of these, nearly two-thirds will be needed in the south and nearly a quarter of all housing need will be in London. Given the demographics of these new households, most are unlikely to become homeowners.

There is also a long-term growth trend in the numbers of 20 to 34 year-olds living in major cities. In Birmingham, Leeds, Manchester, Liverpool and Bristol, the number of houses in the private rented sector has risen by 77% in the last decade.

Renting may be largely an urban phenomenon, but it no longer applies solely to young people. High prices mean people rent for longer. 23% of all households renting are headed by someone aged 50 and above.

Rental growth

The imbalance between supply and demand has pushed up rents in well connected cities’ centres – the type of location most popular with private renters as our YouGov survey shows.

The survey findings also reveal that the cost of renting is the key consideration for private renters raising the question of to what extent can rent rises continue without stretching affordability to breaking point. Rents will continue to rise where supply is most constrained.

Our forecasts indicate that average rents in the mainstream market will increase by 18.2% by 2017, with the greater part of that growth delivered in 2016 and 2017.

Similar capital growth is expected over the period although house price rises will be stronger in the next couple of years, fading from 2016 when interest rates are presumed to pick up.

Help to Buy

Government incentive has created a stir

The Government homeownership scheme, launched in April, has caused a stir in the property market. Although the main part of Help to Buy, the mortgage guarantee, has yet to take effect in January 2014, the £3.5bn equity loan part of the deal, aimed at buyers of new build homes, has already resulted in 12,500 registrations. Over its lifetime, the equity loan part of the deal could support 75,000 sales of new build homes.

The incentive’s boost to housebuilders’ sales, comes against a backdrop of a strengthening property market. Average house prices are rising again and concerns are mounting that further stimulus from Help to Buy which is available to all buyers of properties worth up to £600,000 (not just first-time buyers), might only serve to stoke up property prices. Critics argue that the scheme could push homeownership even further beyond the reach of the people it intends to support.

Regardless of this debate, this short-term scheme, intended to last three years, does not alter the fact that property prices remain high relative to earnings and that demand for rental homes continues.

Taken from
Spotlight: Investing in Rental Britain