Are you spending too much of your income on rent?

City Rental News / November 21, 2017

How affordable is your city? A look at income vs. rental prices around the UK

When I talk about the difference between rental markets in cities around the UK, I’ve often heard the following response: “Of course London is more expensive, people get paid much more there!”

I think we all know this intuitively, but does it justify such astronomical rent prices?

As I’ve outlined in previous articles - London’s 10 Priciest Neighborhoods - London can be extremely pricey.

But do the higher pay rates justify the higher rental rates? And how do pay rates compare to rental rates in other UK cities?

A traditional rule of thumb has been to never spend more than ⅓ of your income on rent or a mortgage.

This is something that has proliferated into the mortgage loan industry across the world with most banks requiring that a loans payment not be above ⅓ of the borrower's income. And, in fact, many lenders have instituted more strict standards since the financial crisis.

So using this reasonable rule-of-thumb (not paying more than ⅓ of our wage for rent) let’s see how your city's rental market fares. I think you will be surprised by the results.

*If you don’t care how we collected, organized, and analyzed the data, please skip down to the Results section to see how different cities weighed in.

Methodology

To answer this question we needed data for two variables - average wage and rent per city. We then took the median (not mean) for both wages and for rent and used them to create an index showing us an easy rent-to-wage comparison.

Wage Data

Luckily for us, the Office of National Statistics does an annual survey to track median wages throughout the UK. The Annual Survey of Hours and Earnings (ASHE) allows us to pull a per-city average wage.

Since the ASHE gives wage statistics in a weekly format, we used the following equation to normalize for a monthly comparison - wage * weeks per year/months per year - or - wage*52/12

Rental Data

Next, we need to look into a per city median rent.

This is pretty easy for us since here at Looped we love to slice and dice property data. From our daily average of 260k rental price data points, it gives us high confidence in our property assessments.

Weighted Average

Given that we cannot guarantee the type of housing the participants in ASHE are living in, our methodology on calculating the average rent-to-wage index is based on a weighted average of the three largest property buckets - 1, 2, and 3-bedroom properties.

When comparing our weighted average to the medians in our buckets, it is slightly lower than 2-bedroom properties in every market we observed - although just 4% lower on average. This gives us a slightly more precise look into the current supply.

Now that we have explained our methodology let's take a look at some of the results.

Results

The UK’s 63 largest cities gave us a great distribution to show the varied rent affordability throughout the UK. We found quite a widespread with rents ranging from 23% of income in some cities to a ridiculous 78% of income in others.

Below you’ll find an infographic taking a look at 15 recognizable cities from across different regions of the UK. This infographic shows each city’s wage and its rental prices for the three size buckets (1, 2, and 3-bedroom)… and most importantly, it shows our rent-to-wage ratio.

Our top 63 cities produced an average of 34% of wages spent on rent - 36% more than the countries average of 25% - but understandable with the benefits of living in UK’s top cities.

The Outliers

Brighton, London, and Oxford

It’s not difficult to guess where people spend the highest percentage of their income on rent... London. But there were three ‘scorching’ areas where it is clearly a landlord's market - Brighton, London, and Oxford.

Unfortunately for Brightonians, they rank 3rd on the list for average rental cost, but a lowly 41st in average wages. This - like many other coastal commute cities - is likely due to Londoners pushing up demand.

On average, renters in those three cities use a minimum of 59% of their wage on rent. For the average person, this is clearly unsustainable and makes other regional cities more attractive - forcing those cities rents to go up.

Low Affordability Rental Markets

Bristol, Cambridge, Edinburgh, and Manchester

From there we see a stark drop, but still ‘hot’ markets in Bristol, Cambridge, Edinburgh, and Manchester - respectively costing a renter 37%-46% of their hard earned wage.

Near Affordability Rental Markets

Birmingham, Cardiff, Leeds, and Plymouth

After looking at the backbone running through the center of the UK - from Brighton to London through Manchester ending in Edinburgh - we finally get to the semi-affordable rental markets

Many of these cities - Cardiff, Birmingham, and Leeds - are all high-growth cities going through change. This growth traditionally incentivizes high earners to move to these cities - forcing a push on rental demand.

Leeds - currently 31% rent-to-wage - is leading a massive growth initiative that could propel its rental markets in the near future as it looks to position itself as the second largest city economy in the UK.

Affordable Rental Markets

Belfast, Glasgow, Liverpool, and Newcastle

Most of the affordable city markets, in general, have low proximity to the larger economic hubs. But each of these cities still has their own industries to boast. And with each having a 30% or less rent-to-wage ratio, it wouldn't be a stretch to forecast these cities enticing newcomers to fuel their high-potential growth markets.

With each holding one or two flagship industries - Belfast’s tourism, Liverpool’s Public Administration, Education and Health, Newcastle’s Retail - it would take major initiatives to see rapid growth.

That's not to say none in this grouping have potential - both Glasgow and Belfast are well on their way to growth for differing reasons.

Glasgow - an economic powerhouse that continues to see year-over-year growth - is trading its manufacturing industry for financial and business services, communications, biosciences, and many more growth industries, and shows no sign of slowing down.

As for Belfast, there’s no city in the UK that has had as troubled a past. Due to civil unrest plaguing the city for decades, investment has been slim until recently. But with figures showing the UK's leading Gross Value Add, Belfast is showing heavy potential.

Other Notable Cities

Aberdeen - with one of the best rent-to-wage ratios at 26% - has the 6th best wage and was 32nd in rental cost. The city may not be for the faint of heart - the weather is not for everyone - but it offers an amazing option for those looking for affordable an affordable city to live in.

Derby - another affordable surprise with short proximity to a number of cities on the list. It boasts a rent-to-wage ratio of just 22%. Propped up by the 8th highest wage on the list, you have options in Derby.

Southend-by-Sea - In the last 6 months Southend has seen some serious changes due to London commuters moving to the coastal town in droves. Massive regeneration schemes - starting with its famous water-front - have made this city a prime target for investors. But the rental price change is too quick for local wages to keep up with a now 51% rent-to-wage.

Reading - a city reaping the benefit of connecting Oxford and London - could have seen a much higher rent-to-wage ratio than the 36% it sees now if it weren’t for the city having the second-highest wage on the list.

Worthing - seen as a cheap alternative to Brighton - faces the same issues as its sister city with painfully low wages - 58 out of the 63 cities. This leaves it with an astounding 47% rent-to-wage.