Why It Matters
Standardised Scores Of Residential Rental Prices
Summary
We have calculated the average (private unregulated) rental prices for different types of housing in your area.
Definition
This set of analyses is all based on the monthly amount you would have to pay to legally inhabit a property under a lease or licence on the open private rental market. The analyses excludes regulated tenancies which are covered by the “fair rent” as set by a rent officer on behalf of the Valuation Office Agency. It also excludes rental prices payable in order to occupy a room within a Multiple Occupancy Home, and rental prices payable in order to reside in accommodation classed as affordable social housing.
Interpretation
STANDARDISED SCORE
| Dataset | Explanation |
|---|---|
| Z-Score of the Rental Price for a 1 Bedroom/Studio Property Across London | We have estimated how many standard deviations above or below the London-wide mean, the postal sector mean rental price is in respect of 1 Bedroom/Studio Property. |
| Z-Score of the Rental Price for a 2 Bedroom Property Across London | We have estimated how many standard deviations above or below the London-wide mean, the postal sector mean rental price is in respect of 2 Bedroom Property. |
| Z-Score of the Rental Price for a 3 Bedroom Property Across London | We have estimated how many standard deviations above or below the London-wide mean, the postal sector mean rental price is in respect of 3 Bedroom Property. |
| Z-Score of the Rental Price for a 4 Bedroom Property Across London | We have estimated how many standard deviations above or below the London-wide mean, the postal sector mean rental price is in respect of 4 Bedroom Property. |
| Z-Score of the Rental Price for a 5 Bedroom Property Across London | We have estimated how many standard deviations above or below the London-wide mean, the postal sector mean rental price is in respect of 5 or more Bedroom Property. |
Why the metric matters from a commercial inhabitant’s perspective
The traditional view of how residential rental prices affects businesses holds that neighbourhoods with residential rental prices below average London rents are likely to be socio-economically deprived neighbourhoods and therefore such areas are likely to be most hospitable to businesses that target customer segments associated with lower income levels, whilst residential rental prices above average London rents are likely to occur in socio-economically privileged neighbourhoods and therefore such areas are likely to be most hospitable to businesses that target customer segments associated with higher income levels.
Whilst in some circumstances this proves to be the case, we believe there are two more nuanced reasons as to why residential rental prices affects businesses. Firstly, the price of rented accommodation is likely to be a consideration for any businesses employees, which resultantly means that an employees willingness to work for a business will be a three-way trade-off between the wages they receive from their employment, the cost of their rent and their time and money spent commuting to work.
If residential rental prices are deviate disproportionately from the London average then employees will seek to either minimise their time and income spent on commuting to and from work by seeking a job in a different location that minimises commuting time and cost so as to make high rents palatable, or they will seek an increase in their wages to offset or compensate them for the increased time it takes to get to work. In a competitive market therefore, business that cannot either be ideally situated for their labour to access or compensate their employees to offset the high rental costs will find themselves at a competitive disadvantage when it comes to hiring staff.
Secondly, business owners need to consider the fact that the where rents reach a certain threshold (subject to legal considerations) landlords may choose to either raise commercial rents to offset the opportunity cost of keeping their real estate asset as a commercial as opposed to residential unit and thus forgoing (possibly more) lucrative residential rental income or they may, given that London permits the conversion of office premises to residential premises, choose to convert a commercial premises to residential use thus forcing a business to have to change its trading location.
Image: Centre For Cities
Why the metric matters from a residential inhabitant’s perspective
The rent a tenant pays in London often represents the single largest repeat expenditure in their lives so much so that it is estimated that most Londoners who rent (privately) spend between around to 20-50% of their monthly income on rent. The financial importance means that rental prices can be the most important driver behind why a tenant chooses to live in a particular area. Every individual property in London is a unique good differentiated into a bundle of attributes that vary in quantity and quality. Such attributes include apply to every property such as the right to receive support in the case of emergency, and the right to receive enforcement services protection from trespassers.
Other attributes are specific to each individual property such as being located near an in-demand school, or being situated near a park. Rental prices therefore matter to a resident because in exchange for whatever price they accept they should seek to maximise the subjective value of any given property’s bundle of attributes. Until this is achieved for the price a rental tenant pays, they cannot be safe in the knowledge that they have secured the best value rental property they can.
General Commentary
As we now know that private rental prices are the sum of the monetary value of the attributes associated with any given property in London, we advise considering more than the mainstream economist’s explanation that private rental prices are solely determined by supply and demand as this seems like a rather naïve explanation.