House prices and rents - why the variation?

Private rents house prices and earnings at the local authority level

Previous blogs have concentrated on either data across England or for Cornwall while others have examined general theories about house prices and rents concentrating on the main drivers of change. With regard to the latter, the role of rising asset values has been identified as the main factor underlying house price rises.  Another factor is the level of earnings. This blog post looks at the situation at local authority level across England to see if there factors at the local level which influence rents and house prices.

 

Why do rents go up?

A main determinant of private rents is the level of earnings, which create a threshold above which they are less likely to rise. To some extent a lack of supply could well push up rents, providing people can afford the additional rent.  Ian Mulheirn argues that rents have risen roughly in line with earnings and that earnings levels provide an upper limit on how high rents can go. Others have argued that supply is the main factor while the cost of mortgages for landlords has also been cited.

 

Hypothesis

It could be argued that private sector rents are also influenced by the share of holiday lets in an area - with higher rents where the share of holiday lets is a significant component of the total number of dwellings rented. In Cornwall there are between 9,000 and 11,000 holiday lets.

 

Methodology

The latest private rent data from ONS was used showing the May 2024 figure for each local authority in England. A number of variables were used:

All and full-time annual earnings

Rents (monthly)

House prices

Private rented properties as a % of all dwellings

Dwelling surplus (dwellings in relation to households)

 

For each local authority, the annual earnings figure was converted into a monthly figure and then the monthly rent as a percentage of this was calculated. We can call this the affordability %.

 

Data was not available for all local authorities. After exclusions a total of 260 (82%) were left out of 317 local authorities.

 

Results

Variables were paired to see the degree of correlation. Correlation does not necessarily mean causation!  There is a very high + correlation between rents and house prices of +0.94.  There is the same as the correlation between house prices and affordability, which is unsurprising following the first correlation. There was a correlation between house prices and rental affordability of +0.88. House prices and FT earnings = +0.85

  

The correlation between rents and full-time (FT) earnings and between rents and FT earnings at the 25% percentile both stood at 0.75. 

 

If we turn to rental affordability and earnings the figures give a correlation of + 0.64 between FT earnings and rental affordability, and  +0.61 between earnings at the 25% percentile and rental affordability. All of these are high correlations.

 

There is a moderate correlation of +0.33 between house prices and the dwelling surplus. There were low correlations between dwelling surplus and rents +0.3 and dwelling surplus and affordability +0.29.

 

It appears that the existence of a dwelling surplus has little impact on the level of rents or rental affordability. This suggests that high levels of second homes and holiday lets do not impact on rents across local authority areas. This is an unexpected result implying that the holiday lets and private rented sectors operate as separate markets. Does this mean that the high incidence of holiday lets is not an issue? Probably not. It suggests that additional house building occurs in these areas above the level required to meet local renting or house purchase needs. 

  

Conclusion

The analysis suggests that rents and rental affordability are not affected by the level of unoccupied dwellings (used as a proxy for holiday lets and second homes). Rather that the demand for holiday lets and second homes pushes up demand for properties which in turn leads to higher levels of house building. Developers therefore operate to meet this induced demand.

 

Private rent data is the median figure for a local authority area. We do not know what the figures are at lower spatial levels. At a scale below local authority level there may be differences in private rents in areas with higher levels of holiday lets.  Anecdotal figures suggest they are higher in St. Ives than in Camborne-Redruth. But does this reflect higher house values in the area which may be the case and as the correlation figure suggests?

 

So what happens to people who find it difficult to find a property to rent? Are they added to the Homechoice register. But analysis of this is problematical due to the issues around the figures. Do some people move to areas with more properties available or end up with friends or relatives?

 

It’s a tricky area where more research is needed.

 

Sources

ONS, rentals.

ONS, Annual Survey of Hours and Earnings. Full-time.

ONS, Housing affordability.

ONS, House prices.

ONS/NOMIS, Census 2021, dwelling numbers, occupied and unoccupied dwellings, tenure and hoSourcesuseholds hous.