On the second anniversary of RLA PEARL does the levelling of the growth in the Private Rented Sector (PRS) represent a new equilibrium in housing tenure? RLA researcher Nick Clay looks more carefully at the dynamics underneath the headline data.

Slowdown in the Growth of the PRS

An analysis of the PRS usually begins with the well-known statistic that the proportion of households privately renting in the UK has doubled since the turn of the century. 

The increase in households in the PRS has grown from 2.8m in 2003 to 5.4m in 2017 (excluding N.Ireland).  Note that before 2003, there was a different method of counting households, so there should be some caution in looking further back. Nevertheless, it is safe to say the proportion has more than doubled since the turn of the century.

However, the narrative has shifted in recent years: 

Chart 1 below highlights that we are now in a period where the proportion of households in the PRS (here across the whole of the UK) is now bumping around at a level of between 17% & 20% of all households. The PRS has hovered around these levels throughout the last eight years:

Chart 1: Pattern of Tenure, UK

PRS RENT Levels

Not only has the growth in private rented accommodation slowed down in recent years, but so too has the growth in rents.

Table 2 below shows rents at a national level across the UK over the previous seven years – what is instantly recognisable is how flat growth has been:

Across the UK, growth in rents has been 8.7% for the period shown. Only in England (9.3%) have rents grown by more. This PRS rental growth in England is only equivalent to 1.49%pa when annualised across the seven-year period.

Analysis of the average inflation (CPI) rate (see this link for an analysis and calculations) for each of the years covered in Chart 2 shows that only in 2015 (where average inflation measured by the CPI=0.37%) and 2016 (=1.01%) did rent growth in England significantly exceed overall price (CPI) growth*. 

In the other UK nations, rental growth has been even flatter – in N. Ireland average rent growth has been less than 1% per annum (0.71%pa), in Scotland it has been flat (0.15%pa). In Wales, median weekely rents have actually fallen in money terms by an annual average of 0.15%:

 

*in 2014 the CPI figure was four one-hundredths of a percentage point lower than rental growth but this is in reality insignificant.

Chart 2: Rents in the PRS

The PRS in the Regions

Chart 3 shows the relative importance of the PRS across England and Wales. The key story here, with of course the notable exception of London, is not the differences between the regions, but how similar the profile is:  In every region of England (and including Wales), the PRS accounts for between 16-20% of all households.

Inner London has twice the level of households in the PRS than the UK average – it is essentially accounts for twice the proportion of households as every English region:

Chart 3: The PRS across the regions

PRS Dynamics - The changing profile of the PRS (1)

If the UK is moving towards a “new equilibrium” in the PRS, understanding the distribution of housing units by tenure in simply not enough. Chart 4 shows the dramatic shift in the age profile of households in the PRS using the measurement used in the annual Family Resources Survey which is to focus on the age of the Head of Household.

Most eye-catching from a visual perspective is the growth in the proportion of 16-24 year olds (who head hosueholds) in the PRS.  By 2017/18, almost three-quarters of people in this age band who are the head of households are so in the PRS. Over the twelve year period, growth of this cohort within the PRS has been around 2.6% per annum.

Far more dramatic however has been the growth, from a lower base, in the proportion of older population cohorts now in the PRS:  Among the 35-44 year-olds, the proportion of household heads in the PRS has grown at a rate averaging 6.5% per annum – doubling the proportion in just 12 years.

Among the 45-54s, the growth hasn’t been quite as high – 5.9% per annum – but this still aggregates to well over 85% (87.5%) growth in the proportion of this age band in the PRS.

Growth levels in the other cohorts means that, of those who are of working age, growth in the proportion of young people under 24 in the PRS is, in fact, the lowest:

Chart 4: Changing Age profile of PRS tenants

PRS Dynamics - The changing profile of the PRS (2)

Finally, Chart 5 highlights the changing longevity of the UK population in the PRS. In 2017/18 24% of households had been in the PRS for less than twelve months – a third fewer than the proportion just eight years ago.

In contrast there has been a sharp increase in the proportion of households staying in the PRS for longer: There has been a growth in the proportion of households in the PRS between three and five years of around 4.5% per year.

Even more dramatic is the proportion of households in private rented accommodation of between five and ten years. This has grown by over 8.5% a year since 2010/11.

The result of this growth has been that whilst in 2010/11 approximately one-third (32%) of housieholds had been in the PRS for between two and ten years, by 2017/18 this had increased to 44%. 

Chart 5: Changing Household profile of duration in PRS

Summary

The lack of rental growth is a disincentive on the supply side to retain investment and, in the long run, maintain the supply of housing.  Policy should focus on supporting the supply of homes in the PRS and maintaining the confidence of landlords in the sector in the face of limited rental growth across the UK.

Growth in the PRS has levelled off and is now no longer growing at the rapid rate it has been for the first 10-15 years of the 21st century.  Outside of London, the proportion of households in the PRS is roughly the same across England’s regions and Wales – around one-fifth of households or less.

London, inner London in particular, is very much an outlier in terms of the proportion of households in the PRS.  Though not shown here, median Private Rented Sector rents in London are way ahead of those in other English regions (£230 per week in London, Vs £141 per week in England as a whole).  However, growth in rents in London have been slower in recent months (see here for evidence), a fact which is often ignored. 

Whilst growth in the PRS has now slowed this does not mean the sector is any less dynamic and subject to change. The profile of tenants and their families are changing rapidly.

Firstly, whilst there has been recent growth in the proportion of all ages living in the PRS, that growth has been most dramatic in older age cohorts, particularly the cohorts incorporating those of working age over 35 years.

Secondly, the duration in which households stay in the PRS is also changing dramatically, the proportion tenured in the PRS for less than two years has fallen (from 57% of all households in the PRS to just 45%) dramatically between 2010/11 and 2017/18.  Those staying in the PRS longer has increased.

 

Some concluding thoughts

These changing dynamics have profound implications for public policy:

Limited rent increases may provide stability for tenants but is a “STOP” signal in the market to potential new entrants, choking market supply. Maintaining the supply of PRS housing in face of limited rental growth is going to be a key issue in the absence of a clear social housing policy.

Secondly, policy looking at the supply of housing within the PRS should not just be about the volume of housing units available.

The profile of tenants in the PRS is fast changing and challenging traditional perspectives.  It is no longer the step many young people take on the road to home ownership. 

To meet the needs of this fast-changing sector, landlords need support to invest in their properties – rental growth (even where rents are in fact growing) at present is clearly not enough to give landlords that confidence to invest.

At present the thoughts of policy makers are fixated on a no-longer existent buoyancy in the PRS – and not enough on supporting the changing demographics of tenants.

This post reflects the views of the author, and not necessarily those of the RLA.