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Rents have gone up, and they keep going up. This is a boon for the growing BTR/Multi-Family sector in the UK. However, the question is, how far can this really go? Eventually rents must hit a limit where further increases are just not possible.

A person could potentially spend 100% of their income on rent, and live off credit cards, for a while, but it obviously wouldn’t be sustainable. There is some evidence that this is already happening as counter intuitively, credit card debt has been increasing over the past year despite the rise in interest rates.

But that aside, there must be an upper limit on how far rents can rise before they are unsustainable, and if there is, then there should also be a relationship between the levels of rent affordability and the changes in rents.

To test this, we’ll look at a few different areas of the UK using the REalyse data platform. The first and most obvious starting point is London, not just for its size, but also due to the extreme differences between neighbourhoods.

The chart above shows a heatmap of ‘affordability’ showing the proportion of income that someone earning £80,000 a year would have to spend to afford the rent on a two-bedroom flat. The lighter colours show a higher percentage of income that would need to be spent, ie less affordable, and the dark colours show the more affordable locations where a much lower proportion of income would need to be spent on rent. It shows pretty much what we would expect to see, the centre is more expensive.

Using this as a guide, and looking across the entire country I looked for areas of low, medium and high affordability relative to the median income of the people living there. In each location I looked at the change in rents between March ’22 and August ’23. A somewhat arbitrary date range, however August data is the most up to date at the time of writing and using data from winter months risks brining in more seasonality-based variations.

For each location I looked at the changes in rent per square foot, both the asking rents and achieved rents, for 2-bedroom flats. It did not take long for a pattern to begin to emerge from just a handful of locations.

Table showing the % of income to be spent by 2 earners for a 2 bedroom flat, the corresponding £/sqft values and the changes over a 17 month period.

Plotting these against each other, even in this relatively small sample showed a relatively clear inverse relationship between (un)affordability and rent increases. The more affordable an area, the higher its past rental increases. The more un-affordable an area, the lower its increases.

If this chart is to be believed, then it implies that, all else being equal, there is a lot of potential for higher rents in most locations. If people in Central London can afford 50%, then presumably that can also be the case in other locations. Again, take this with a large grain of salt, these are median income figures, not the upper or lower quartiles, it is a relatiely small sample, and the income information for locations such as Mayfair and Blegravia may not paint the complete picture of wealth.

But, if we extend this quick analysis and stretch the afforability of all locations in the sample to the same level as Central London then you can see that there is still enormous upside for rents in most parts of the UK.

Whether or not people in other parts of the country will be as willing to pay this as those in London remains to be seen.

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