Research article

Housing affordability

Affordability constraints in the sales market have driven more people to rent, but the flexibility renting offers has made it a lifestyle choice too

Housing affordability has become a major global issue since the GFC, partly because mortgage lending has been significantly curtailed by regulation. First-time buyers, usually needing the highest loan to value and loan to income ratios, have been the most affected.

A decade of low interest rates, meanwhile, has meant that those who could access mortgages were able to borrow cheaply. This, together with undersupply of new dwellings in many countries, has fuelled price rises.

In the last five years residential capital values across 40 major economies have risen by an average of 29%, while rents have grown by just 13%. Ireland, Canada, Sweden and New Zealand saw the highest increases in capital values relative to rents. Only six countries, including Russia and Italy, saw rents rise faster than house prices over the same period (see chart).

As a consequence, more people are turning to the rental markets for their accommodation needs. For some, this is due to affordability constraints, but changing lifestyles are driving this too. City-living, globally-mobile young people are settling down later in life. Flexible rental models suit them well.

At the other end of the spectrum, the baby boomer generation is entering retirement age. Fitter for longer, they want many of the same things Generation Y and Z are looking for: quality accommodation in vibrant urban environments, access to amenities and a sense of community. Rental products are emerging to serve them too.

Across Europe, the homeownership rate has fallen from 77% to 75% in the last decade

Savills Research

These factors are contributing to declining levels of homeownership in much of the developed world. Across Europe, the homeownership rate has fallen from 77% to 75% in the last decade. Around one-third of people in Anglophone countries now rent. The shift has been particularly marked in the UK and Ireland (see chart).

Some countries have bucked the trend though. France, for example, has seen significant levels of homebuilding in the last decade and homeownership rates have risen from 61% to 64% in the last ten years.

Rent controls: help or hindrance?

Housing affordability has become an increasingly politicised issue in the West. In response to rising accommodation costs, almost one in every two developed nations now employs some form of rent controls.

Housing affordability has become an increasingly politicised issue in the West

Savills Research

Investors in the sector are generally comfortable with modest caps on rent inflation. They can provide greater certainty of income while reducing perceived risk. Happy tenants are more likely to stay put for longer. Cities such as New York and Berlin, for example, are home to most highly regulated rental markets in the world, but they are still among the most institutionally invested.

There is, however, a balance to be struck. Rent controls can have the effect of deterring investment, whether into existing properties or the development of new ones, exacerbating the very shortages they aim to ameliorate. Ultimately, solutions to housing affordability should be focused on delivering more supply. Anything that impedes institutional investment, which has the ability to deliver stock at scale, is likely to be counter-productive.

Our case studies below illustrate three examples of rent regulations from around the world. Both the investment community and renters themselves will be watching these precedents keenly.

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