In a recent blog, we gave consideration to the potential impact COVD-19 could have on the residential sales market for the balance of 2020.
In this article, we take a look at what affect COVID-19 salary cuts and furlough schemes might have on tenant earnings and the corresponding impact on the affordability in the residential rental market.
Affordability is measured by the 'affordability ratio' which is calculated as the amount spent on rent divided by the gross income/salary of the tenant. The team at Dalaoft have devised a very specific calculation of affordability based on individual tenant data across the country. Their analysis shows that:
- Across the UK, the affordability ratio is 27%, meaning that tenants on average, spend 27% of their pre-tax gross income on paying rent. Understandably, the ratio is the highest in London at 30%. The Southeast of England has a ratio of 29%.
- Across the UK, approximately 11% of renters spend more than 40% of their income on rent.
As shown in the following graph, the data has been used to project the potential impact that a 20% reduction in salaries (through furlough or salary cuts) could have on the affordability of rented property.
So, what does all of this mean? Country wide, a 20% reduction in salaries would cause the affordability ratio to increase from 27% to 34%, in effect meaning that renters would on average, be paying a third of their gross salary on rent. The analysis suggests that a fall of 20% in salaries, while clearly not desirable, is sustainable in terms of rental affordability. Only in Greater London does the ratio start to approach 40%, a level that is generally seen as starting to be problematic. The Southeast, with a ratio of 34% certainly remains on the right side of the line.
However, the above reflects averages, which can be a little misleading. Clearly every tenant is unique with specific circumstances. A more interesting picture is painted when you look at the proportion of tenants who would actually end up paying over the 40% problematic threshold. The graph below shows that country wide, the number of renters who would be paying more than 40% of their gross income as rent increases from 11% to 30%, representing a far more significant burden than present. In the Southeast, the proportion of tenants paying more than 40% of their gross income would increase to 34%.
The above suggests that while the market might look resilient, there are will undoubtedly be a considerable number of individual cases both in the Southeast and country wide where affordability becomes a significant concern for tenants and their landlords.
Our advice is that landlords should have frequent dialogue with their tenants (via their agent where they have appointed one) to try to determine the extent to which the tenant is falling into, or at risk of falling into financial difficulty. Where this is the case, it should be ascertained whether the impact is likely to be short term due to being fuloughed, or longer term due to a job loss or permanent salary reduction. Based on the specifics, landlords should agree some temporary rent relief with an agreed schedule of catch up payments when the tenant's salary returns to normal, or a longer term solution reflecting the more permanent change in circumstances.