HC 1652 Communities and Local Government CommitteeWritten submission from the Resolution Foundation

1. Individuals and families on low-to-middle incomes are falling through the gap in the housing market between home ownership and social housing. Historically high house prices, a tighter mortgage market and stagnating wages have left this group shut out of ownership for the medium to long-term. In 2010, it would have taken the average low-to-middle income household 31 years to accumulate a deposit for the average first home if they saved 5% of their income each year and had no access to the “bank of Mum and Dad”. The picture looked a lot worse in London and a bit better in the North of England.

2. At the same time, cuts to government support for social housing will put further pressure on already long waiting lists, making it even less likely that working households will get access to council homes. This leaves many people on low-to-middle incomes stuck in a private rented sector that is poorly suited to providing a stable long-term home. In addition, an asset divide between those who own a home and those who rent long term is opening up.

3. A new approach to build-to-let development using institutional investment has the potential to be part of the solution to the housing needs of individuals and families on low-to-middle incomes who are unable to buy a home in the medium to long term. Attracting more institutional investment from pension funds and life insurance companies into the private rented sector would allow more rental accommodation to be built at a time when public funds are limited and the buy-to-let market is recovering only slowly. More importantly, it would support a shift in the type of rental product that the sector offers. Longer term contracts, higher quality, more consistent management and the ability to make home improvements would replicate some of the desirable features of home ownership for those who become long-term tenants.

4. The other important features of a new approach to build-to-let development are:

The public sector invests its land for development rather than selling it upfront;

Local Authorities take a more flexible approach to planning, balancing affordable housing requirements with the housing needs of working people;

Investors retain an option to sell some rental units after a fixed period of time if necessary to secure competitive returns on investment; and

Rented homes are managed at scale by professional landlords who can provide tenants with a high quality service at the same time as keeping management costs down.

5. Institutions were important investors in the private rented sector in the early twentieth century. But their role dwindled over time and currently only 1% of their overall investment in property is in the residential sector, much less than in other countries. This is, in part, because investment in the private rented sector has been perceived as less competitive than investment in alternative assets and investors have been concerned about the potential reputational risks related to tenant management. Previous government efforts to bring in institutional investment, such as the Private Residential Sector Initiative, have stumbled because they have not been able to guarantee adequate returns.

6. The new approach to build-to-let set out in this report could change that. Making it work will depend on close partnership between Local Authorities, institutional investors, developers and landlords with the flexibility to renegotiate established approaches to addressing local housing needs. Investors will need to look again at their opportunities for investment in the residential sector rather than continuing to focus exclusively on the commercial property sector. In its forthcoming housing strategy, central government will need to give greater priority to build-to-let in the disposal of public land rather than focusing exclusively on homes for sale. For their part, Local Authorities will need to balance their ongoing commitments to housing the most vulnerable with a broader economic agenda for local growth and employment that depends on housing those on low-to-middle incomes in the private rented sector.

November 2011