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A new approach to renting

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    Becky O'Connor
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Many people renting their homes from private landlords feel stuck between a rock and a hard place: Rebecca O’Connor FRSA asks whether institutional investors give trapped private renters a way out?

Ask people who are renting privately and most will tell you they would rather own their own home. According to the 2017/18 English Housing Survey (EHS), 58% of private renters expect to buy. While some renters will be able to fulfil this aspiration, rising house prices and wage stagnation means many – particularly younger people – have no choice and are effectively trapped in privately rented accommodation. That trap is getting harder to escape with a growing class of ‘perma-renters emerging; there are about 4 million privately rented homes in the UK, up from 3.8 million 10 years ago.

Given the dominant aspiration to own among renters, data showing that 25% have been renting privately for five to 10 years and a further 20% for 10 to 20 years should ring alarm bells. People are not just renting in their early twenties; they are having families and growing old in someone else’s investment. According to The Parent Rent Trap, a recent Royal London policy paper, more than half of babies are now born in rented accommodation (private and social). Ten years ago, 5% of people in private rent were aged 55-64. By 2017-18, this had almost doubled.

Higher costs

But why does it matter if people have to rent forever? Because, the higher costs, worse conditions and relative insecurity of renting privately all put renters at a disadvantage. The EHS also shows that the private rented sector has the highest proportion of non-decent homes at 25%, compared with 19% for owner-occupied homes.

Renters are paying more for the privilege of living somewhere less desirable than if they owned the same home with a mortgage. According to the Department of Communities and Local Government, typically, they pay more in monthly payments for their insecure and often inferior dwellings. This makes it harder to save; 11% of private renters had substantial savings of £16,000 or more, compared with 30% of owner-occupiers. For couples starting a family, the higher cost of living and of having children can bang the final nails into the coffin of their dreams of home ownership.

Before the financial crisis of 2008, it was the other way round: home ownership cost more than renting from a landlord. This makes sense; if we accept home ownership as the aspiration of the majority, renting needs to cost less so that renters have a bit of spare cash left over at the end of every month to put towards a deposit to buy.

But policy responses to the financial crisis turned the tables. Lenders restricted access to first-time buyer loans, favouring buy-to-let landlords with large cash deposits. Meanwhile the Bank of England embarked on monetary policy that saw the cost of having a mortgage drop significantly, thanks to a decline in interest rates from 5.75% in 2008 to 0.75% now. On a £180,000 home loan over 25 years, such a drop would have instantly cut monthly repayments for a homeowner with a variable rate mortgage from £1,132 to £658. Homeowners with mortgage debt saw a life-changing fall in housing costs, while renters – stuck between a rock (the landlord) and a hard place (the deposit) – have steadily seen a rise. Now, in the UK renters pay on average £833 a month, compared to average mortgage repayments in the UK of £658 a month; a 25% premium.  

The consequence of people paying higher housing costs for longer is that the prospect of home ownership moves further out of reach and with it, all the advantages that those on the ladder enjoy, such as ever decreasing mortgage balances and an end in sight to housing costs when they retire.

Conditions

According to the EHS, standards in private rented accommodation are worse than in owner-occupied homes. Life phases, such as having children are entered and left, and all the while, you might not be allowed to decorate, put up pictures or have a dog. Social housing might not be a choice either, but it does offer security and a degree of predictability on outgoings.

Renting from a private landlord feels far more like a game of chance in which the stakes are yours and your family’s shelter and wellbeing. Is the landlord planning to sell or will they increase the rent every year? Will they continue to invest in the property? If you are lucky, your landlord will tick all the right boxes. Unlucky, and you will be wrestling with feelings of insecurity and unhappiness as someone makes their ‘passive income’.

Meanwhile, eviction remains a real threat and the longer people are privately renting for, the greater the risk of eviction. The sense of insecurity builds rather than diminishes over time. The number of families in temporary accommodation – where homeless families are placed – has only been going the wrong way since 2010, according to government figures.

The impact of new measures aimed at better protecting renters from unfair evictions and high fees is yet to be seen. However, the threat of evictions will continue in relation to landlords wanting to sell as the guidance still allows evictions in this instance. These changes also fail to take the fundamental structural problem that an entire housing tenure has been outsourced to individual investors who view properties as rental yields and capital gains, not as long-term homes for people unable – possibly ever – to own their own homes.

A role for institutional investors?

What are the answers? An affordable social housebuilding programme? Certainly, though the chances of government and housebuilders agreeing how to do this cost-effectively for one and profitably for the other seem slim. But the less obvious and possibly more realistic, answer is to incentivise a different kind of landlord.

Many institutional investors – those who need to find a home for the pensions savings of their customers – would like to build-to-rent. They would get long-term returns and capital appreciation, while tenants get decent landlords and decent accommodation. Like buy-to-let landlords, making a return it is the most attractive element for institutions. However – because they are investing for pension customers – they want those yields to be sustainable over generations. This combined with institutions’ ability to build at scale and reduce unit costs, should – in theory at least – deliver lower rents.

Such an approach brings with it significant challenges including the reputational risks and cost associated with the management of purpose-built rented homes. If institutions can address these issues, they have the potential to change cultural attitudes to long-term private renting. If the majority of landlords were professional institutions with significant long-term financial interests in keeping tenants happy and properties attractive, would private renting continue to be seen as the poorer relation of home ownership? Or could it, at last, be a genuinely desirable lower-cost alternative option for people?

Critically, the lower-cost part of this solution requires emphasis. Institutions will change little if they focus on the lifestyle luxury appeal of renting rather than its affordability. One of the advantages of low-cost over luxury would be potentially longer tenancies and more demand in areas where people are priced off the housing ladder. The reliability of the income from good long-term tenants at the more affordable end also reduces the maintenance costs of high turnover units.

Success would mean the UK could finally have a housing market more like Germany’s, where renting is accepted and normal. It could help restore private renting to its rightful place in the tenure mix where more people feel like there is a chance for them to live where they want, whether that is a home of their own, or a new order rental property.


 Becky is personal finance specialist at Royal London, the mutual insurer, and co-founder of Good With Money, a website that has championed ethical personal financial choices since 2015. She is a former award-winning finance, property and business journalist at The Times.

 

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  • And one more thing to add to my recent post having just read the Royal London paper...


    I got from the tenor of that whole paper the idea 'being trapped in rented property' - continuing the idea that only ultimate home-ownership is the Right Thing and nothing less is acceptable. This is completely unnecessary and wrong - there are other alternatives.

    There is nothing at all wrong with long-term renting in many other countries around the world and it is not stigmatised like it is in this country. What is different in these other countries is that tenants have rights - they can decorate, they have security, they can improve the property knowing they will be there as long as they like, they pay low or affordable rents. We need to make the culture and legal protection the same in this little isolated island, so there isn't the need to spend you whole life worrying about 'the mortgage', who do not have to amass illiquid capital that could be used to enjoy the lives of them and their family and doesn't end up with an ageing relic in need of improvement at the age of retirement rather than funds to help their children and enable a move to a smaller similar long-term rental property

    As someone said, after the H Bomb the Americans invented a weapon that destroyed people but left buildings unaffected. they call it The Mortgage.

  • I agree with the OP and the comments by Tom, completely, the rot set in with Right to Buy and then the governments refusal to let councils use the proceeds to build more houses. Then we have the growth of the Buy-To- Let empires where lots of people bought houses to rent out to compensate for the loss of capital growth in shares and the generous tax reliefs. 


    Sadly in the post covid, Conservative government world there IMHO is little change of any Big Changes. However, a number of Big Nudges may have some effect. The first ones have already happened which make it less attractive to own BTLs - the Additional Rate on SDLT and LTT on purchase of a BTL wipes out a few years rent receipts, plus the lack of mortgage interest rate relief, plus the tightening of gas, electric, furnishings and immigration statue makes it much less attractive for the average middle class person trying to find ways of providing for the lack of a final salary pension scheme in the new world. If you buy a BLT through a company, as many have started to do, you still get the SDLT surcharge but you can still get mortgage relief.

    If HMRC scrapped that for all but registered social landlords it would be the final nail in the coffin for the BTL empire builders. The average return on a BTL empire is about 3.5%, I was told by someone who managed 160 BTLs, which makes it less attractive than shares seeing as capital growth is no longer the main attraction, plus the loss of liquidity I the investment. So this might mean more incentives for Build To Rent by institutional investors and registered social landlords.

    However what would really nudge the whole problem, more a big kick than a Big Nudge would be to (A) reintroduce a form of rent control like they do in Germany as I understand and in many other countries - even the USA!, harking back to the fair rents of the Rent Act 1977, and (B) the big one, to abolish the concept of the Assured Shorthand Tenancy, so that all tenancies were Assured, so landlords could not get tenants out unless they didn't pay the rent or abused the property.

    And the third Big Nudge that is already operating in Wales - Abolish the aberration that is the Right to Buy and allow councils and RSLs to build new housing stock without fear of them being bought up cheap and flogged on by tenants in 3 years time!

    Will any of this happen - who knows?

    One very interesting comment that came up in the Zoom chat was that the current pension arrangements in this country are that the pensioners own their house so don't need as much pension to live. If you have to rent, your pension can never be enough to pay it. So you need to get long-term rental to be reliable, good quality and affordable, and a realistic options for people. 


    The alternative is making people generate capital to buy a house, usually which is too big for them in their old age, and unaffordable to run or heat, and is illiquid when they need it. In effect you are moving the problem from BLT landlords to the government to fund the rents,  which could be seen as the government moving money from the Govt to landlords at the end of peoples lives, rather than the market forces created by the big nudges mentioned ensuring that rents are cheap, investors put their money in stocks and shares not using homes as investment pots, not homes for people


    Hannah

  • Becky, I am glad you mentioned Germany and their cultural focus on renting being different than the UK. I see the UK as being in major housing crisis, with the "affordable" (always in quotes, it seems) rents in London, for example. This includes L&Q, a not for profit funded (it seems) by institutional funding and with 90,000 homes in and around London. The redevelopment of areas such as South Acton is nothing less than social cleansing, with "poor doors" and other outright discrimination a key part of the system we live in.


    So, the source of funding is one part of the equation, but I feel we first need to own that, democratically in the first instance, we elected Margaret Thatcher, with all parties in power since then (Labour and Conservative and coalition) conforming to an orthodoxy of reducing rental housing stock in favour of homeownership. This has been a significant factor in the growth in both asset and income inequality we see in the UK.

    In short, the answers need to be more radical. We need a central government-funded programme in the many billions to build more rental housing stock and from a philosophical place of providing for those who have been cut out of that system in the forty years of Friedmanesque "self-interest" economics that Thatcher and Reagan were highly successful in embedding as "this is the best way to do things".

    Rant complete :)

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    Many people renting their homes from private landlords feel stuck between a rock and a hard place: Rebecca O’Connor FRSA asks whether institutional investors give trapped private renters a way out?