Communities and Local Government CommitteeWritten evidence submitted by Dr Julie Rugg

The Private Rented Sector: Its Contribution and Potential

A major review of the private rented sector (PRS) was completed in 2008, which included an overview of the sector and assessment of policy development in a number of areas where the sector was reportedly under-performing. Since that time, the development of the PRS has taken place in a context of economic downturn and of new policy initiatives from the Coalition Government. The growth of the sector means that it is losing its role as the marginal tenure: living in the PRS is coming to be regarded as a mainstream housing option. This is not to say that the PRS is growing as a consequence of active tenant choice. The growing proportion of private renters has to be viewed in the context of difficulties in accessing the mortgage market and increasing restrictions placed on the availability of social housing.

This brief submission will offer some reflections on the contribution of the PRS to the housing market in the UK; and then overview and update the principal policy areas that were covered in the Review.

The Contribution

The essential role of the PRS has not substantially altered. It remains a flexible tenure that plays a multitude of roles in local housing markets.

The sector now accommodates a larger share of the housing market, roughly equivalent to the proportion of social housing. A great deal of discussion has become attached to the actual size of the market, and whether it is “big enough”. Some commentators attach intrinsic virtues to particular tenures and use international comparison to argue the need for the sector to grow further. It is perhaps better to seek “balance” as a virtue preferable to size. A PRS that grows as a consequence of failures in other tenures is unlikely to remain affordable, as rents will respond to growing demand. It is possible to argue that, for the UK, a strong PRS is evidence of an unbalanced housing market.

A larger PRS also has implications for welfare policy. A growing housing benefit budget reflects an increasing proportion of tenants in the private rented sector where, it might be argued, benefit is funding private pensions rather than creating commonly-held equity as would be the case with social housing.

Furthermore, in the UK, the welfare system is predicated on an assumption that housing costs will disappear for the majority of owner occupied households reaching retirement in property that is no longer mortgaged. However, lifetime renting would also bring an increased burden in welfare payments to subsidise the continuing housing costs of privately renting pensioners.

The Review underlined the need to view the PRS not as a single entity, but as a combination of more or less discrete sub-markets, the characteristics of which vary from area to area. Very little further research has been completed since 2008 to define those sub-markets in more detail, but some developments should be noted:

the growing incidence of “reluctant renters” matching a growth in the number of “reluctant landlords”: difficulties in the owner occupied market may be creating a growing class of “renter-landlords”;

a possible decrease in student numbers may have an impact on the viability of some large-scale student housing schemes, particularly where rents are deemed to be uncompetitive;

the housing benefit market is growing to absorb an increasing number of working households unable to pay the rent; this reflects both rent increases and under-employment/low-paid or fluctuating employment in an unsteady job market;

evidence is now emerging that some Broad Rental Market Area boundaries outside London are creating communities where the rents are no longer affordable; households moving to lower-rent area face higher commuting costs which are not taken into account when assessing household eligibility for tax credits; many households are facing a difficult task in balancing housing and commuter costs;

impacts on the viability of property supply at the bottom end of the PR, as a consequence of the rent restrictions introduced under the Welfare Reform changes; and

prospective increases in demand for rental properties as, from 2014, restrictions on immigration to the UK by Bulgarian and Romanian nationals are lifted.

Issues

Supply and affordability

Since 2008, failings in the owner occupied and social rental markets has substantially increased demand for PRS property, whilst at the same time increasing the likelihood that properties becoming available on the open market are likely to become privately rented. The restricted supply of mortgages has reduced the ability of owner occupiers to compete with cash purchasers looking to invest in rentals, and new-build by social landlords is containing an increasing proportion of properties at market rental.

The combined influence of a strong PRS and limited alternative options for households seeking accommodation means that rental affordability is compromised. According to the most recent English Housing Survey (2010–11) housing costs for private renters absorbed 43% of their gross weekly income; amongst owner occupiers the figure was 19%, and social renters 29%.

The economics of the PRS are still poorly understood. Supply-side characteristics are hugely variable, and will have an impact on rent strategies of the landlords involved. It would be interesting to see whether local landlordism has remained sensitive to localised market rents, with landlords willing to accommodate low levels of rent increase in order to maintain tenancies. Larger landlords may be more likely to view yields in terms of overall return including void periods, and so prefer to seek year-on-year rent increases on the understanding that tenants will always be found.

Localised impacts on changing landlord structure are not well understood. In York, the building of a large-scale private sector hall of residence has increased rents in the area, by setting a new high achieved rent. This has, in turn, increased rents across the non-student rental market. Local “stories” of how the rental market is faring are lacking in policy debate on the sector.

Institutional investment

Policies to secure public subsidy for institutional investment in the private rented sector is supported by a large and vociferous industry lobby. This lobby has interpreted growth in the PRS an indicator of “positive choice” for renting amongst private tenants. Debate around institutional investment has created a substantial supply of mediated data on the sector, overshadowing an evidence gap around issues such as rental affordability, tenant choice, and market viability at the bottom of the PRS.

Professionalising rental housing management

Since 2008 there have been a number of developments with regard to the registration of landlords, including the introduction of a compulsory register in the London Borough of Newham, and a landlord licensing system in Northern Ireland. Neither scheme evidences a clear commitment to improving standards in the sector by actively debarring non-compliant landlords. As yet there is still no evidence that any registration scheme currently operating in the UK or the Republic of Ireland have contributed measurably to improvements in rental housing management.

Improving property quality

Overall, property quality in the sector is likely to be improving as a greater proportion of the influx of new-built properties will be privately rented. However, the current economic and policy climate has created circumstances in which existing poor-quality rental property is unlikely to be improved. Welfare Reform will have a detrimental impact on property quality: landlords’ ability to finance property improvement may be compromised by low achieved rents at the bottom of the market; and tenants’ ability to “shop” for better properties has been undermined by rent restrictions brought by the LHA. Economic migrants may choose to live in substandard property at lower rents in order to maximise their disposable income. Environmental Health Offices have not been demonstrably active in the pursuit of poor quality rented property; public sector staffing cuts are not likely to have improved performance.

Sustainable tenancies

Security of tenure remains an issue. Recent commentators have discussed the possibility of tax incentives for landlords to create longer tenancies. This issue overlooks the fact that most tenancies fail as a consequence of rent arrears, which is in itself a reflection of worsening rent affordability and restrictions in levels of LHA support. In giving tax incentives to landlords to offer longer tenancies, public funds are being directed to the wrong part of the problem. There needs to be a better understanding of circumstances where landlords already offer longer tenancies, on order to learn from parts of the market that work well in this regard.

Homelessness prevention and discharging homelessness duty

Under the Localism Bill, local authorities are able to discharge their duty to homeless households with the offer of a tenancy in the PRS. Demand for “LHA-friendly” properties is already high, and competition for properties is evident between organisations helping households that fall outside the homelessness legislation, and local authorities seeking to fulfil their homelessness duty. In this competition for properties, incentive payments become commonplace, skewing expectations amongst landlords at the bottom of the sector.

In aiming to create a better context for working with the PRS, social lettings agencies have been established across the country. The homelessness agency Crisis has been active in creating good practice guidance for agencies, but some schemes face difficulties in terms of competition or lack of co-operation from local authorities. Social lettings agencies need scale in order to function as businesses. It seems that a more strategic, cross-agency approach to procurement is still lacking.

“Problem” private renting

One recent development supported by the Coalition Government has been the introduction of planning permission for houses in multiple occupation. Local authorities are now able to define areas in which planning permission will be required to convert property for use as a HMO. However, the planning objective of containing the supply of shared property runs counter to welfare policy that increases demand for shared property. Furthermore, the intention of the policy—to restrict the proliferation of student shared property—has also had the impact of reducing the supply of property to young professionals unable to afford to rent a self-contained dwelling. Again, there has been a failure of strategic oversight.

January 2013

Prepared 16th July 2013