Have UK rents hit an affordability ceiling?
A new poll of 11,000 renters by flat-share platform SpareRoom has revealed that a third of renters are spending more than half their income on rent, and some fear that their finances could be at a breaking point.
An enormous 81% spend 30% or more of their income on rent, which is the threshold used by the Office for National Statistics for rental affordability.
How big is the issue?
The 30% threshold for rental affordability isn’t agreed on by all. Letting agents tend to look for tenants with an income of at least 2.5 times the annual rent, meaning that they would spend no more than 40% of their income.
Tenants also seem to measure affordability differently. While 8 in 10 renters pay more than 30% of their income on rent, only 54% said that their rent was unaffordable in the SpareRoom poll.
And to date, the rising proportion of income taken by rent doesn’t seem to have caused arrears to rise. In PayProp’s latest Rental Confidence Index, just 21.9% of respondents said tenant arrears had risen over the previous year, while 14.6% said arrears were lower than usual. Almost two thirds reported no change.
Concerns over tenant affordability haven’t stopped rents from increasing either. The Office for National Statistics reports that rents rose 4.9% in the 12 months to March 2023, up from 4.8% in February.
Signs of stress
There could still be a breaking point for tenants. Debt charity StepChange reports that 15% of private renters now rely on credit to pay for essentials, up from 11% in January.
And that’s just existing tenants. Estate agency Hamptons reports that a growing proportion of young people are choosing to live at home instead of entering an unaffordable rental market.
Affordability is about to be tested further. The cost of servicing a buy-to-let mortgage is rising, and landlords will want to pass that extra cost on. The Renters (Reform) Bill will also introduce new costs for landlords, like the membership fee for the mandatory redress scheme. Tenants’ incomes will be squeezed by inflation too, which is forecast at 6.9% for this year.
Landlords and agents can reduce their risk by requiring guarantors for tenants who don’t meet affordability requirements and using automated systems to send arrears reminders when rent isn’t paid. As rental demand is higher than supply, landlords can afford to hold out for tenants who have sufficient income, a guarantor, or both.
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