London remains the least affordable region in which to rent, although affordability has improved over the last two years, Zoopla has found.
Rents in London and the South East are 18% higher than in Q4 2007. Both regions have experienced weaker growth over the past two to three years. Affordability peaked in 2015 at 45% of net earnings.
Richard Donnell, research and insight director, at Zoopla, said: “The private rental market is a complex and diverse tenure which has been the focus of a growing number of policy changes with further changes being proposed.
“In London and southern regions of England rental affordability has become stretched and this has acted to limit the growth in rents and resulted in a modest improvement in rental affordability.
“Rental growth is set to remain subdued in the near term but the underlying demand for renting is set to remain robust largely a result of the high cost of home ownership, in terms of deposits and income required to buy.
“An under researched part of the market is the level to which greater sharing of property has contributed to higher rents, particularly in inner London, which makes accurate assessments of the affordability of renting more complex.
“Weaker new investment by private landlords means slower growth in new rental supply which also supports overall rent levels. In London there are localised concentrations of new build supply where availability of high-quality rental supply will increase in 2019, boosting choice for renters.”
This is down to stretched affordability, slower employment growth and, more recently, weaker in-migration. In London, average rents today are on a par with rental levels last seen in 2014 (£1,250 per month).
Meanwhile the most affordable areas to rent are the northern regions of England, where rents are at the most affordable level for a decade.
The Midlands and Wales have registered above average rental growth since 2007, with rents rising by an average of 17% and 20%.
Growth in northern regions has under-performed the national average, increasing by an average of just 3%.
Donnell added: “In northern regions of England, rents are their most affordable for a decade as rental growth has fallen well short of the growth in average earnings. This does not automatically mean rents are set to rise.
“The growth in rents is dependent upon growth in employment. The lower cost of accessing home ownership means it is easier for renters to shift into home ownership than in regions with high house prices and this keeps rental growth in check.
“At a national level the proportion of earnings spent on rent has remained relatively stable over the long run.
“This is to be expected as renters can only allocate a certain amount of earnings on rental payments. This relationship between rents and earnings is an important attraction for new corporate investors entering the market and developing so-called build to rent developments.
“The supply of rented homes is an important driver of rental levels and affordability for renters. Continuing to attract long term, stable investment that continues to boost the supply of quality rented housing is important for the longer-term health of the private rented sector.”
There remains potential for further rental growth in regional markets where affordability remains attractive and levels of employment are rising.
Lower costs of accessing home ownership in regional markets are likely to limit the pace of rental growth in 2019.
Affordability is more of a constraint to rental growth in southern England, although the high cost of home ownership will continue to support rental demand and limit any downward pressure on rents.
Total rental growth since 2007 has varied between 1% and 23% across regions. This is down to variations in employment growth as well as the affordability of home ownership.
Year-on-year rental growth at a regional level currently ranges from 0.4% in the East of England to 5.3% in Yorkshire and Humberside.
Renters will allocate a certain proportion of earnings to paying rent,with the proportion of net earnings spent on rent remaining broadly stable over the last 15 years – ranging between 28% and 32%.
When affordability becomes stretched, rental levels will typically adjust.