The ‘rent trap’ is only half the problem – landlords are pricing out first-time buyers to start with
Daniel Bentley, 24 July 2014
The latest instalment in the English Housing Survey series highlights many of the difficulties facing that growing mass of would-be first-time buyers despairing of ever getting a foot on the ladder. An important point is the proportion of people’s incomes being taken up in rent, preventing them from saving that money towards a home to buy.
Higher rents are reinforcing the existing difficulty of first-time buyers trying to get on the property ladder. But it is the increasing preponderance of the people charging those rents – setting the “rent trap” – that is at least in part driving the housing shortage in the first place, pushing prices up and forcing more and more younger people into private rented accommodation.
There is no doubt that we are not building enough homes to meet the demand, and haven’t been for some time. But as well as looking at ways to increase supply, we should also look at where that demand is coming from.First-time buyers and existing owner-occupiers are not just up against each other for homes, they are up against a class of investors which is, slowly but surely, increasing its hold on the housing market. ONS figures show that between 2001 and 2011, levels of owner-occupation (previously rising) levelled out at about 15 million in England and Wales, while the number of homes that were rented from private landlords almost doubled – from 1.9 million to 3.6 million.
This process has continued in recent years and as the English Household Survey shows, home ownership has begun to fall not just as a proportion of the housing stock but in absolute terms too. In 2012/13, 14.3 million English households (65%) were owner-occupied, down from a peak of 14.8 million (71%) in 2006. Meanwhile, the number of privately rented homes has risen from about 10% during the 1980s and 1990s to 4 million (18%) last year, when it overtook the social rented sector which accounts for 3.7 million homes.
The number of home-owning households is now back to where it was during the government of Margaret Thatcher, the prime minister probably most attached to the idea of a property-owning democracy.
This hasn’t happened by accident. Investment in buy-to-lets has been encouraged in a multitude of ways since the late 1980s. In recent years this has reached a new level as overseas billionaires have moved in, too, particularly in London. In only one of the latest manifestations of this trend, when George Osborne announced that the newly-retired would no longer have to buy an annuity, but could spend their pension pots as they pleased, Mayor of London Boris Johnson suggested they should invest in property. As if house prices in the capital aren’t high enough already.
Many argue that without these investors there would have been fewer houses built, and there may be some truth in that, but that is a failing of the house-building industry which is not helping the wider situation. It is not as if there is a chronic lack of demand; it’s just that developers won’t meet it at the price most people can afford.
Others say we need a larger private rented sector, to house a more mobile population that wants short-term rentals. But how big do we really want this sector to be? There is clear dissatisfaction among many of those already renting privately: yesterday’s English Housing Survey showed only 52% were happy with their tenure (it was 93% among owner-occupiers).
People want to buy a home, but can’t. And their plight is being exacerbated by a rising rentier class of buy-to-let landlords which is pricing them out of the market and then hoovering up any spare cash that they might have wanted to put towards a purchase. It’s time to ask who is really benefiting from this arrangement.
Daniel Bentley is the author of ‘The Future of Private Renting: Shaping a fairer market for tenants and taxpayers‘ and co-author of ‘Finding Shelter: Overseas investment in the UK housing market‘
In 1955, a time when there was still a shortage of housing after the war, the average price of a UK property was £2,000 (1) , which adjusted for inflation is £39118 in today’s money (2 ). The average weekly wage was £10 17s 5d (3), worth £ 212 in 2010 (2). This meant that someone on average earnings in 1955 could purchase the average priced property for less than four times yearly earnings.
Today the average wage is approximately £25,500 having dropped from £28,000 in the first six month so 2010 (4) , With the average price at £165,000, the average earner needs more than six and a half time annual earnings to purchase the average property. In fact, the would-be purchaser today is even worse off because the taxation of the average wage now is more severe than it was in 1955.
To the problem of obtaining a mortgage today is added the need for much increased deposits since the economic crisis became full blown in 2008 after the collapse of Lehman Bros. To get property suitable for raising a family in most parts of the UK would cost in the region of £200,000. Even on an income of £50,000 a couple would struggle to find the now commonly required 15-25% deposit for such a property.
As for the large majority earning around the average income or below , a property purchase is out of the question. In places such as London even those on £50k would be priced out of the market because a studio flat can cost £250-300k. The sad truth is that most people who have not already got on the housing ladder are unlikely to ever get on it as things stand. Instead they will have to pay extortionate rents with precious little security of tenure.
Imagine how easy it would be to live in Britain now if housing was in real terms as cheap now as it was in 1955. Someone on less than half average earnings would be able to buy a starter home. The private rental sector would fall considerably both because much of the cost of renting comes from the capital value of the house and the demand for rented housing would be much reduced.
The cost of housing is striking at the heath of society in the most fundamental way: it is preventing people from starting a family viz.:
“The findings suggested 18 per cent of 18 to 44 year olds, equivalent to 2.4 million people, are actively putting off having children because of high housing costs. This rises to 24 per cent among 18-34 year olds. One in five 18-44 year olds have waited for as long as six years to start a family, while 37 per cent expect housing costs to continue to delay their plans for another four years, according to the survey by the charity Shelter.” Two million Britons delay having a family due to high housing costs – Myra Butterworth : Daily Telegraph 18 Jan 2010)
This is unsurprising, for how can a young couple today who cannot afford to buy a property – the vast majority – be expected to have any sort of settled family life when they cannot buy , social housing is scarce and private rented property has little security of tenure..
The coalition government has just made a bad situation worse. In the 2010 spending review it announced that new tenants for social housing would have to (1) pay 80% of the market rent – which would make it impossible for large parts of the population to live in places such as London – and (2) not have security of tenure for life. (There is policy creep on these things and it is odds on that once the principle is established, part of all of the new regime will be extended to existing tenants.)
It is important to understand that it isn’t only those who have purchased a property or who own it outright who are effected. If only a fifth of those struggling to pay their mortgages lose their homes that will be hundreds of thousands of people in need of rented accommodation on top of the hundreds of thousands who are already on council and Housing Association waiting lists. Such an influx will not only increase competition for social housing, it will push up private rents. The other major effect of reducing house prices will be fewer and fewer new build houses.
We are rapidly returning to the housing shortages of the post-war decade. Then a massive programme of council housing was followed by first Labour and then the Tories. The same is needed now together with action to force developers to build on land they hold or the land to be subject to compulsory purchase at a price for the land without planning permission. The following is also needed:
1. The end of the Right To Buy
2. The end of buy-to-let mortgages
3. The re-imposition of formal controls on mortgage lending to ensure there is not another housing bubble – see appendix.
4. A restriction of social housing to those born British citizens. It is indefensible for foreigners to be given housing before those born and bred here have their needs satisfied.
Of those suggestions all but the last are still within the remit of Westminster. Britain can stop immigrants from outside taking social housing , but as was shown by the response to Gordon Brown’s “Social housing for local people” in his last months in number 10, such preference would fall foul of both British and European law; British law because of the requirements of our equality legislation and the obligation on local councils to house vulnerable people in need, especially those with dependent children, and European law because any person legitimately resident in the EU has the right to move to any part of the EU and receive equivalent treatment in terms of social provision to the citizens of the receiving state. It is also probable that the Human Rights Act would come into play, most probably with the clause relating to the right to enjoy a private life. Britain would have to either leave the EU or force a change in EU law to stop EU residents from outside the UK taking social housing.
The problem of immigrants taking social housing is significant. The Equality and Human Rights Commission produced a report in 1989 which showed immigrants in approximately 10 per cent of social housing (5). Even with the coalition government’s proposals for new tenants, t his is likely to increase substantially as those who flooded into the UK when the new entrant countries such as Poland joined will soon begin to qualify for social housing.
The cruel truth is that the prudent have been subsidising the imprudent since the beginning of this crash. Those without mortgages, both those who own outright and those who rent, are paying through depressed wages, lower benefits, reduced public services and the long term debt caused by the excesses of the past 12 years. Those who are being subsidised are the people who took out massive mortgages, often by the straightforward fraud of exaggerating their incomes, and/or ran up vast debts by drawing on the equity in their homes. The heaviest losers are those who have never owned a house outright or had a mortgage. They have gained nothing during the property boom and have had every rising rents inflicted upon them as property prices inflated unconscionably.