The United Kingdom’s residential market is split into 9 main regions: Greater London, the South East, Eastern, South West, East Midlands, West midlands, North West, North East and Yorkshire & Humberside. Our work focuses on rental growth which directly links to Real Estate financial products. We use the index of private housing for rental growth, which is a measure of the change in price for all private rental properties year on year. This encompasses all rents whether they are new or renewed rents. This index is taken using administrative data which has been collected from a variety of sources and indexed to create a rental growth series. The agencies collecting this data use rental officers to collect rental prices over specific periods for rents from private landlords. In summary, all regions showed a combined growth rate of 1.4% in the 12 months to February 2020. Owing to the Corona virus crisis, our forecasts are not as optimistic as our forecast this time last year. Most of our economic indicators have been lowered and we illustrate our forecasts later in this report.
UK Regional history
The United Kingdom’s residential market is split into 9 main regions: Greater London, the South East, Eastern, South West, East Midlands, West midlands, North West, North East and Yorkshire & Humberside. Our work focuses on rental growth which directly links to Real Estate financial products. We use the index of private housing for rental growth, which is a measure of the change in price for all private rental properties year on year. This encompasses all rents whether they are new or renewed rents. This index is taken using administrative data which has been collected from a variety of sources and indexed to create a rental growth series. The agencies collecting this data use rental officers to collect rental prices over specific periods for rents from private landlords. In summary, all regions showed a combined growth rate of 1.4% in the 12 months to February 2020. Owing to the Corona virus crisis, our forecasts are not as optimistic as we forecasted this time last year. Most of our economic indicators have been lowered and we illustrate our forecasts later in this report.
UK Regional history
Since 2016, the UK’s rental market has slowed, and this downturn was mainly due to the downturn in London. Since 2018, there has been a continued increase in rental growth through all regions, with London being mainly responsible for this upturn. See figure 1.
Figure 1 shows the rental growth rates for London and the rest of the UK. The rates are chosen from February year on year. Both growth rates began to rise from February 2014, with London’s growth rates peaking of 3.8% shortly after February 2016 after which it began to fall. The rest of the regions continued to rise until the start of 2017, after which they began their decline until February 2018. As London’s growth rate began to experience a recovery, the rest of the regions followed shortly thereafter.
UK Nominal Rental Growth Forecasts
The economic drivers we use are modelled in real terms (taking inflation into our calculations). Our objective here is to forecast rental growth and where necessary, we explain the reasons for the results. The regions are the Government economic regions and we use the Office for National Statistics (ONS) historical growth rates up to the end of 2019. All the economic drivers are taken from Oxford Economics. Below, we graphically illustrate the results for the nine regions. Our rental growth results show the forecasts from 2020 until 2024, and we calculate the 2020 – 2024 year on year forecast. We use the same economic drivers as before: House prices; the employment level; real disposable income; previous rental growth rates; population; Gross Value Add (a close measure of GDP) and Housing Completion is our inclusion of a supply indicator encompassing completed new dwellings for the region.
Our results find that the East Midlands will experience the highest year on year growth rate in 2020 at 2.4%, with the lowest growth being experienced in the North East. The North East will struggle to maintain higher growth rates than 0.5% until 2024, whilst London will continue to experience steady growth for the five years. The table 1 below provides a short summary of our forecasts from 2020 – 2024.
London’s rental prices have steadily increased since the start of 2018, and this upward trend is set to continue but not by the strong rate as many are led to believe. Short supply of housing has led to the increase in rental prices. Also, the thought of increased regulation as well as taxes have seen landlords leave the sector altogether. The problem of affordability in London has also been a factor which we have taken into consideration in our calculations. That said, the Corona Virus effect is set to be a factor in the coming months, and due to the fact the GDP forecasts have largely been revised downwards by up to 4.5% – 5% (which we have factored into our forecasts), we forecast lower than expected growth rates over the next two years, and as there will be increasing levels of real estate activity, the London area should return to higher levels between 2022- 2024.
Shortly after the Brexit vote, this region was largely seen as the one with the most potential for rental growth. Higher employment and prosperity across the South East was expected to be a significant factor in determining the rental growth market. With the economic outlook now dampened, and the businesses under pressure, our forecasts only show steady growth year on year over the coming years. With home buiding projects signed off and underway, the propsects for a supply problem will not be eradicated, rather, it will be soften the higher rental price increases. This region presesnts varying challenges due various uncertaincies which still surround Brexit, as the negotiations have not yest started much less finalised. What should be a strong economic region currently presents itself with accompanying uncertainty, and if major changes occur, we will revisit our forecasts and update them accordingly.
As with the projections for the Southern regions in England, the East of England should experience a downward shift in rental grwoth year on year. The dislocation in the jobs market accounts for much of this forecast, as does the weaker consumer sentiment. This will have an immediate impact on prices and we project lower activity thereafter. The Corona virus timespan will be a determining factor in individuals’ disposable income. A short timespan will see a quicker recovery even though there will be a significant cost to the economy, however, a lengthy timespan suggests a harder impact to individuals’ finances and this will signify a harder impact on rental growth. We do, however, expect the market to recover in the following years with year on year growth at 1.8% in 2023.
The South West is one of the fastest growing regions in England. The region’s high productivity levels account for much of this steady growth, and with a better quality of life than in many regions, the growth prospects are forecast to be higher and steady over the coming years. Population gorwth and a robust housing market have been a main factor for young professionals in the region. Many from the London area have made the move to more affordable residential accommodation in the last few years. Decmeber 2019 actual year on year rental growth was 2.2% and we forecast a slightly lower forecast for 2020 at 1.9%. We still envisage steady growth in the region with forecasts for five years at 1.8% year on year in 2023 and 1.5 in 2024.
The East Midlands had a strong 2019 in terms of rental growth, recording a year on year to December growth of 2.1%. House price growth in this area leads the way, and this growth is accompanied by growth in rents. Surveys taken show that private rents have began to be increasingy more unaffordable for this region’s middle income earners – this being the group which generally determines rental afforabilty. There are also an increasing number of much needed workers such as teachers and nursing staff who are in this bracket and are unable to afford to rent homes. However, our forecasts are determined by other factors, and we continue to look at the ongoing economic prosperity of the East Midlands and house price increases over the coming years.
The overall outlook for the West Midlands is one of steady private rental growth in the coming years. The region’s year on year growth to December 2019 was 1.3%, and this growth is set to be stable in the coming years after taking the revised GDP growth outlook into account. The urban living sector in the region is beocming more pronunced with increasing demand. Transport systems have enhamced the performance of the rental market, and with the imminence of the High Speed 2 railway, demand for rents has increased. Areas such as Birmingham are expected to grow more significantly, an this is exacerbated by the transport links to London which are set to dominate the reasons for demand to this area.
This region has seen a slowing down in house price growth, however, this does not mean that house prices will decrease. The region should experience moderate house price growth and this should be accompanied by the same rental growth performance. Manchester and Liverpool are seen as areas with strong growth potential, however, revised growth forecasts may see this region have the strongest impact from the Corona virus after the crisis is over. This leads to our forecasts for this area being relatively weaker.
We continue to see the North East rental price growth below that of other regions for the full 5 year forecast. House prices are generally lower and also more affordable but economic prospects are not that of southern regions. That said, productivity, real income and job prospects in the region have improved from recent years, and there are signs of increases in start-up knowledge-based businesses. The region is the smallest, comprising of 2.5 million inhabitants and there is still a healthy growing demand for rental property. Although there are positive signs of some overall growth, the region most probably will not experience the levels of growth as its southern counterparts in the near term, especially taking into account the revised forecasts following the Corona virus impact.
Yorkshire and Humberside
At the end of 2019, Yorkshire and Humberside experienced a year on year growth rate of 1.9%, and this positive growth rate is set to continue into for the full 5 year forecast. Affluent Yorkshire towns will continue to attract individuals and rental prices will increase on the back of this. One of the attractions of the region is the better quality of life, and many famililes will look to take advantage of this together with the amenities and good schools. These factors together with affordable housing have quickly become an appealing for those looking to take up residence away form areas such as London and potentially downsize to more modest housing. Our forecasts show steady rental growth over the full period of between 1.4% and 1.8%.
Correlations and Economic Drivers
In this part of our analysis, we explain the correlations (the strength of associations/relationships) between the different economic indicators which explain our rental growth figures. This means that, we explain for example, the extent to which changes in house prices explain the rental growth figures. In table 2 below, figures are shown from +1 to -1, with figures closer to +1 meaning a perfect relationship, meaning that house price changes year on year for example, fully explain the changes in rental growth and have a perfect relationship. Figures close to -1, mean that changes in house prices for example, have no relationhsip with rental growth and do not explain the growth rates at all. Our table 2 is shown below.
We have our usual economic drivers in table 2 and we have included two final economic explainers, Rent 1 and Rent 2. These are economic indicators which are previous rental growth rates. Rent 1 is the previous years growth rate whilst Rent 2 is the growth rate the year before last year (two years ago). In all the economic drivers/indicators, we measure the strength of the relationships between them and the nominal rental growth rates for each area.
The results show that changes in house price have the most significant effect on residential rental growth figures. For example, West Midlands and Eastern England show 0.58 and 0.53 respectively – a strong correlation/relationship. This measn that house prices are a significant driver in rental growth. Employment is significant amongst the more southern regions but not the north of England. For example, Greater London employment shows a strong 0.57 figure, meaning that employment is a significant driver of rental growth, and this is explained by the increasing requirement for tenants to be high up the affordability ratio whereas the North West at -0.01 and North East at -0.13 are not as significat explanation to rental growth (although this is still a fcator which determines rental growth).
Housing completion explains has a strong relationship with rental growth across all regions with the exception of the North West and North East, however, real incomes do not deliver such a strong explanation across all regions. Although this is still a factor, it is not as strong an explainer as the increases in house prices. Finally, the previous years’ rental growth, seem to be a determining factor for determining the forecasted rental growth rates. The growth rates two years ago are overall not as strong as the ones the year before, with the exception of the East Midlands and Yorkshire and Humberside.