In the latest edition of UK Economic Outlook we released our latest projections for house prices in the period to 2025. In our main scenario, we expect the house price-to-earnings ratio to remain close to its all-time high, at around 8.5. This means that it will not become any easier for workers to get onto the housing ladder, as house prices are likely to rise at a similar rate to wages.
Given that the cost of housing is likely to remain prohibitively high for many groups, we conducted some new research into the affordability of the rental sector. The proportion of 25-34 year olds who rented privately in 2017/18 stood at 46%, compared with just 20% two decades earlier. This increase is likely to reflect the greater difficulties in buying a house. However, rapid house price inflation has not just affected young people. Over the past 20 years the proportion of those renting privately has risen for all demographic groups, while the proportion owning a house with a mortgage has fallen for every group. This means that affordability in the rental sector is a concern for more people than ever.
To determine whether rental prices were affordable for UK workers, we assumed that rent should cost no more than 30% of gross annual income, a benchmark that has been widely adopted by previous studies. On a nationwide basis, an employee would need an annual salary of £23,800 for the median private rent to remain at or below this affordability threshold. However, the median annual wage stands a little below this, at £23,400, suggesting that there are likely to be issues in the sector.
Both wages and private rents vary enormously across the UK. Our study compared incomes and rents for hundreds of different occupations in 11 different regions. We found that four regions – London, the South East, the East and the South West – had average rents above 30% of the median regional income in 2018. In London, the average rent was as high as 42%. These four regions pulled the national average over the 30% threshold. At the other end of the scale, the average rent in the North East was just 25% of the median regional wage.
We paid particular attention to key workers when we looked at rental affordability by profession. We define key workers as public-sector employees essential to the smooth running of society, such as teachers, nurses, firefighters and police officers. The affordability of rents for these professions showed a similar trend to regional averages. London and the South East were particularly prohibitive for key workers; primary and nursery teachers, nurses and prison officers in the most expensive areas of the country face affordability ratios above 30%. For prison officers in London the ratio was 45%, meaning that they could be paying almost half of their income in rent.
The difficulties of finding affordable rented accommodation could have broader societal effects. They may result in shortages of workers in particular professions, if employees are faced with either very expensive rent or a long commute. They could also prevent potential employees from taking up job opportunities in more productive areas of the country, which in turn could limit social mobility and productivity growth. A steady rise in the proportion of properties used for multiple occupancy in London over the past 25 years suggests that some workers have made a different choice. Faced with a need to work but unable to buy a house or pay high rent, workers are trading down the quality of their accommodation and are sharing properties.
These trends are not irreversible. The government could intervene to increase the supply of properties by relaxing planning laws and committing funds to affordable housing in its forthcoming spending review. It could also take inspiration from policies adopted elsewhere, such as rent controls or regulations on short-term letting platforms. Where appropriate, there could be a role for large employers too, by relocating roles to more affordable areas or negotiating better rates with letting agents on behalf of their employees. A mix of these policies and commitments could result in benefits to the economy through improved social mobility and higher productivity growth, as well as greater wellbeing among affected workers.
