Communities and Local Government CommitteeWritten evidence submitted by Dr Tim Brown

Summary

There is a consensus among many organisations in favour of a “modern private rented sector” that provides a good standard of accommodation to meet the needs and demand of a range of type of households within their financial means. There is, however, little agreement on how to deliver this agenda in terms of quality, regulation and rents.

It depends on reaching an agreement on the future role of the private rented sector especially in relation to other tenures ie social housing and owner occupation.

The growth, diversity and changing characteristics of the private rented sector provide both challenges and opportunities in addressing this agenda in an era of financial austerity.

An inquiry into the quality, regulation and rents in the private rented sector is timely and welcome. It also tackles the imbalance in debates caused by the recent focus of interest on institutional investment in build to let.

Nevertheless, it is important to appreciate the relationship between the financing of new supply and quality & regulation. The negative image and perception of the sector impacts on potential future new provision through build to let.

There are important lessons to be learnt from North America and Western Europe. For example, there is conclusive evidence from countries, such as Germany and the USA, that it is possible to have a buoyant private rented sector with long-term security of tenure and rent control.

Introduction

The Centre for Comparative Housing Research (CCHR) at De Montfort University has a track record of engaging with research, policy and practice on the private rented sector. We have undertaken a study for the Department for Communities and Local Government on “international policy comparisons on the private rented sector”.1 Dr Brown, the author of this paper, was a member of the independent Montague Review that investigated how to encourage greater institutional investment in build to let.2 CCHR staff have been involved in numerous housing market studies (including coverage of the private rented sector), for example, Birmingham, Coventry, Leicester & Leicestershire and parts of the Yorkshire and Humberside Region. From a practice perspective, CCHR, through its leading role on the development and evaluation of choice-based lettings, have investigated the opportunities and challenges of incorporating private rented properties within this type of lettings process

The aim of this submission is to provide the Committee with an overview of the private rented sector so that the debates on quality, regulation and rents are located within the broader policy agenda. This paper, therefore, focuses on the following topics:

Characteristics of the private rented sector.

Policy implications.

Supply.

Learning lessons from abroad.

Characteristics of the Private Rented Sector

The following table provides data on the private rented sector in England between 1971 and 2010.

Table

KEY CHARACTERISTICS ON THE PRIVATE RENTED SECTOR IN ENGLAND

Year	Number of Dwellings	Percentage of Housing Stock	Condition of Stock: Proportion of private rented properties not meeting decent homes standard3
19714	3.1m	19.3%	NA
1976	2.3m	13.6%	NA
1981	2.0m	11.3%	NA
1986	2.0m	10.3%	NA
1991	1.8m	9.0%	NA
1996	2.1m	10.1%	62.4%
2001	2.1m	10.1%	50.7%
2006	2.9m	13.6%	46.8%
2010	3.9m	17.4%	(2009) 40.8%

Source: Pawson, H. & Wilcox, S. (ed) (2012), UK Housing Review 2011–12, Coventry & London, Chartered Institute of Housing and the Building Societies Association, Tables 17a & b and 23a & b.

The overall features of the sector are nearly a century of decline followed by a significant recent revival. Approximately 75% of households were in the private rented sector after the First World War, but this declined to less than 10% by 1991. By the end of 2010, this had increased to over 17% of households living in the sector. Approximately two million additional households were renting in 2008 compared with the early 1980s. The 2011 Census for England and Wales highlights that the proportion of households in the social rented sector and in private renting are approximately the same.

The overall quality of accommodation, however, remains poor. Over 40% of properties did not meet the national decent homes standard in 2009. There is also a significant body of research highlighting the relationship between overcrowding/inadequate housing conditions and poor health and educational attainment,5 which is especially evident in the private rented sector.

The sector is diverse and fragmented. Rugg and Rhodes6 identified ten distinct sub-markets including young professionals, students, housing benefit market, tied housing and temporary accommodation. In terms of supply, the sector can be characterised as having a few large private institutional and many small landlords. Landlords with less than 100 properties own approximately 90% of the private rented stock. Only 1% of landlords own more than 10 properties.7

Many factors have contributed to the revival of the private rented sector. These include deregulation from the late 1980, and the “buy-to-let” boom in the first decade of this century. Equally important, however, are the supply and demand trends in the housing and labour markets. Access to owner occupation, especially for first time buyers, has become less affordable, while the opportunities to become a social housing tenant have been reduced because of the increase in the size of housing registers (which nearly doubled in the first decade of the twenty-first century). Labour market factors have included greater mobility requirements in some occupational sectors especially in the early stages of working careers, for example, financial services, as well as growth in the higher and further education sectors with the number of individuals in full time education increasing from 1.4 million in 199596 to nearly 2 million in 200607 and an increase in migrant workers from Eastern European countries (often referred to as A8 countries).

There are, in addition, three significant recent trends that are changing the characteristics of the private rented sector:

An increasing number of households that are in the private rented sector for the long-term—approximately 20% of households have been at their existing address for more than five years.

A growth in the number of households with children living in the private rented sector—this type of household now forms at least 25% of all private rental households.

The continued increase in “accidental landlordism” ie owner occupiers unable and/or unwilling to sell.

This generates a major tension for policy makers and practitioners. Need and demand in the private rented sector increasingly centres on long term family accommodation. But supply continues to be focussed around short term tenancies based on assured shortholds. Small landlords are unlikely to want to let on long-term tenancies (see below). Thus, what is required for the need/demand side is not what is likely to be provided by the supply side.

Policy Implications

The key issue is the future trajectory for the private rented sector. There are, in essence, two alternative policy scenarios. Firstly, it could become the tenure of choice for households that are unable to meet their aspirations for owner occupation as well as those unable to access social/affordable housing ie “a modern private rented sector”. Secondly, the sector could revert back to a residual function if the owner occupied housing market revives and there is a growth of new affordable housing supply. The outcome will depend principally on the strategies that are developed and implemented for the three tenures. For example, the successful development and delivery of policies to meet owner occupation aspirations would lead to a levelling off of the growth of the private rented sector. Addressing issues of quality, regulation and rents requires an explicit statement on the future role of the private rented sector.

Households with children envisaging a long-term commitment to a property in the private sector will require greater security of tenure than is possible through assured shorthold tenancies. This presents a fundamental challenge to small landlords, as the ability to quickly regain possession is an essential component of their decision-making strategy. It is further supported by the activities of lenders that also favour assured shorthold tenancies as a way of reducing risk ie if the landlord defaults on payments then the lender has the “comfort” factor of knowing that tenants are on a short-term tenancy.

This example illustrates the complexity of the topic. Current government strategy centres on two separate approaches for creating a modern private rented sector. Support is being provided for build to let schemes through institutional investment. At the same time, there is a reactive stance for addressing specific sub-sector issues such as “beds in sheds”. The latter is strongly focussed on the localism agenda, so enabling councils to develop approaches that focus on specific issues. This is illustrated by the recent example of the London Borough of Newham introducing a system for compulsory landlord registration. Other examples include tackling poor quality student accommodation comprising older terraced properties concentrated in inner areas of large cities such as Hull, Leeds, Nottingham and Portsmouth. Nevertheless, this poses major challenges for councils in a period of financial austerity in prioritising this type of activity as it frequently leads to conflicts between students, landlords and long-established residents who perceive a drastic decline of the quality of life in their neighbourhood.

However, as the next part of the paper shows, these two approaches are, in reality, not separate. For instance, greater regulation and rent control to address problems in the existing stock could provide a negative signal to institutional investors that are looking for policy stability. Similarly, the promotion of long-term tenancies as part of build to let schemes might lead to smaller landlords existing from the sector.

Relationship Between the Existing Stock and the New “Build to Let” Model

Thus, although the House of Commons Communities and Local Government Committee have indicated that this inquiry focuses on the quality and regulation of the private rented sector rather than new supply, the two aspects are interrelated. There has, of course, been considerable debate and discussion on the potential of institutional investment for build to let as evidenced by the Montague Review findings and the subsequent actions of the Government. This has, to some extent, diverted attention away from the issues of quality of the existing private rented stock and its regulation.

These two apparently disparate debates are, as previously highlighted, connected. Policy makers and practitioners ignore this at their peril for a number of reasons. The popular (mis)perception of the sector remains rooted in the recent past as illustrated by frequent mentions of television comedy programmes such as “Rising Damp”. Current media coverage of problematic sub markers (for example, beds in shed) reinforces this view. As a substantial body of evidence from many groups of stakeholders to the Montage Review of the barriers to institutional investment in private rented homes highlighted,8 challenging and changing this perception is essential if institutional investment is to become a reality. Similarly, submissions from local authorities to the Montague Review demonstrated the difficulties faced by councillors and MPs whose constituency caseload contains disputes between landlords and tenants, and allegations of over-bureaucratic officers enforcing inappropriate action against landlords and at the same time a lack of action by the same officials against rogue landlords. As the leader of one local authority commented in oral evidence to the Montague Review, it is extremely difficult to actively support new build to let in the private rented sector when the “experience of my members is one of conflict and tension between tenants, landlords and communities”.

Not surprisingly, therefore, one of the justifications in support of institutional investment put forward by a number of councils is that it will act as an exemplar to existing landlords to improve the quality of their product. However, without fundamental changes such as the stable rental contract proposed by Shelter in 2012, it is difficult to be optimistic on the “exemplar” effect. As many commentators have noted, the sub-markets in the private rented sector tend to operate independently. The demand for new build private rented sector provided through institutional investment will be households unable to access owner occupation or social housing—the forgotten or squeezed middle. This is a distinct sub-market that is different from those for students, housing benefit claimants, homeless households and migrant workers.

The Montague Review, thus, highlighted the importance of “image” ie providing tenants, financial institutions and local communities with the assurance of a consistently high quality of provision. Consideration was given to establishing some sort of “kitemark”, but this was rejected as overly-bureaucratic. Nevertheless, it was recommended that the housing task force (which is currently being set up in the Department for Communities and Local Government) should work with industry bodies to develop voluntary standards covering aspects such as the quality of accommodation, including standards of construction, energy efficiency, maintenance and refurbishment and the professionalism of housing management. It is, thus, essential that debates on quality and regulation of build to let schemes be linked to those for the existing stock. This is especially because of the inappropriateness of having separate quality and regulatory systems for different parts of the private rented sector.

Learning Lessons from Abroad

A number of countries have a significantly higher proportion of households in the private rented sector compared to England. These include Germany (48%), USA (32%), Sweden (21%) and Switzerland (57%). Although each of these countries has a thriving institutional investment market in the private rented sector, smaller landlords generally, dominate this tenure. In each case, there is a buoyant private rented sector characterised by long-term security of tenure and rent control.

Although there are differences between countries, regulation of the sector is an important issue. It has many functions. One of these, which are common in many countries, is to ensure that that sector performs a social role. In this respect regulation and supply incentives are often combined. Research conducted by the Centre for Comparative Housing Research for the Department of Communities and Local Government showed that private sector social supply schemes, which exist in countries with large private rented sectors, encourage private sector organisations and individuals to invest in, and in some cases specifically to build, dwellings in return for a degree of regulation.

The schemes provide support through measures such as grants, tax advantages and sometimes soft loans for the building or acquisition (and sometimes improvement) of real estate intended for rental with conditions attached that limit both rents and the incomes of the eligible households. Germany, France, the USA and Australia all have examples of private sector social supply schemes. They boost the size of privately owned rental sector considerably in Germany, France and the USA. In Germany the scheme is long standing, was much more significant in the past, and is an important explanation for the large private rented sector. In Australia it is new and small-scale. There are additional examples to be found in Belgium, Ireland, Spain and Switzerland. All these countries have schemes that trade incentives, in the form, variously, of long term rental contracts, rental guarantees, financial support and fiscal advantages, for constraints on rents and requirements to house people whose incomes fall within specified thresholds and ceilings. Regulation and incentives are thus closely linked. England does not have a comparable scheme.

Further information on the links between regulation and incentives in several European countries can be found in a study co-authored by a member of CCHR (Professor Michael Oxley) and colleagues at the OTB Research Institute, Delft University of Technology in the Netherlands.9 This shows how private rented housing regulation works in Belgium, France, Germany Ireland and the Netherlands. The study also shows an increasing convergence between the private (market) and the social rented housing sectors across Europe.

This is not to suggest necessarily that transfer of detailed policies from these countries to England is possible. Instead, an awareness of policies in other countries could be used to stimulate a debate in this country on the role of the private rented sector and the function of regulation.

January 2013