In this week's blog, we continue to unpack complex and sometimes difficult-to-digest topics. We look at what could happen in housing if the challenges we face in this country aren't met. The importance of framing these arguments this way isn't to languish in despair, fixating on the worst-case scenarios that may never be, but to understand what those consequences may entail for all of us if the cards we are dealt are less than favourable. Sounds intriguing? Please read on.
One of the fascinating aspects of modern language models is that they enable relatively quick and detailed answers to some of life's significant questions. However, at this stage of their genesis, the accuracy of the answers is still beholden to the questions being the correct ones. One of the questions we posed in these pieces back in 2022 was that rising rates and mortgage market slowdowns would not have a meaningful long-term effect on house prices; we theorised that a confluence of factors based on supply and demand economic principles and market-driven forces of investor opportunity would serve as two major pillars supporting the market. As time has passed, we can now reflect that our assumptions were accurate. However, we also proposed a second assumption that the tipping points the media prophesied in 2022 would not arise from areas where people struggled to buy; instead, it would originate from the point where rents exceed 50% of income. Now, moving forward to 2025, we can revisit those questions, but this time, not rhetorically, but to one of the world's most significant language models.
Determining when renting becomes "unaffordable" in the UK necessitates an examination of the trends in house prices, rental prices, and wage growth. We can now provide an informed estimate grounded in historical trends and current trajectories. Historically, UK house prices have risen more rapidly than wages. Although some corrections do occur, long-term trends indicate an average annual growth of 5-6%. Rental inflation has surged, especially following the pandemic, with rents increasing by 8-12% each year in major UK cities. Wage Growth Lag – average UK wages have risen 3-4% annually over the last decade, often failing to keep up with inflation and living costs. Affordability is commonly assessed as rent exceeding 30-35% of gross income. This threshold has already been surpassed in cities such as London, with many renters allocating over 40-50% of their income to housing. But what are the implications if we fail to meet our housing targets and these metrics become widespread nationally?
Projecting the tipping point, assuming rents continue rising at 8% annually (a conservative estimate) and wages continue to increase at 3% annually (based on long-term trends), is now achievable using the modelling. Using historical assumptions, a renter spending 35% of income today could be spending 50% or more by 2030-2033, which would be widely considered unsustainable across the UK—not just in London. To drill down using the assistance of the A. I forecast that by 2031, the average UK annual salary is projected to be £44,337 (assuming 3% yearly wage growth). Average annual rent is projected to reach £22,674 (assuming 8% yearly rent growth). Ergo, the Rent-to-income ratio would hit 51.1%, exceeding the 50% threshold, making renting unaffordable for a significant portion of the country, and we hit the tipping point.
So, what would happen? You would see a change in ownership patterns towards corporations, a steep rise in multi-occupancy living, and possibly significant government intervention. You would almost certainly see the beginning of a significant repricing in the market. So, I know what you are thinking: OK, the machines are telling us that the end is nigh; that certainly sounds like “fixating on the worst-case scenario may-never-happen” sort of talk—how can this be avoided?
Well, we asked the model one more question: can we build our way out of this situation, given the correct set of circumstances? It gave us a frank but unambiguous response: we can, and creating more homes is the most effective long-term solution to the UK’s rental crisis, but it’s not a quick fix. The country faces planning restrictions, high construction costs, and a slow-moving approval system. To succeed, the UK must streamline planning laws, incentivise small and large developers, and invest in infrastructure. Without rapid expansion in housing supply or a substantial uptick in forecasted economic growth, rents will continue outpacing wages, leading us down the wrong path. However, by acting now, we can slow that trajectory down long enough to sustain a long-term healthy market.
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