Rent ceilings needed to tackle affordability crisis
- Rent inflation exacerbated by spiralling housing benefit bill in a vicious circle
- The cost of supporting low-income households in the private rented sector has more than doubled in a decade
- Indefinite tenancies and index-linked ceilings on rent rises would give growing numbers of renters the security they need
Tenants of private landlords should be given the right to stay in their property for as long as they please with no risk of their rent rising above inflation, a new Civitas report urges.
A new regulatory regime is needed in the private rented sector to prevent landlords exploiting the housing crisis to their advantage at the expense of both tenants and the taxpayer.
Private sector rents now account for 40 per cent of tenants’ incomes, on average, much higher than in either social or owner-occupied accommodation. A growing lack of affordability has manifested itself in a growing housing benefit bill for taxpayers:
- The number of private renters requiring housing benefit to meet their housing costs has more than doubled in the past decade, from 722,000 in 2003/4 to 1.7m in 2013/14, and is forecast to reach 1.85m in 2018/19.
- The amount of housing benefit rent subsidies claimed in the private rented sector has also more than doubled in real terms (after inflation), from £3.9bn in 2003/4 to £9.5bn in 2013/14, and is set to top £10bn in 2018/19.
- The proportion of housing benefit that is paid to the private rented sector has increased by more than half since 2004/5, from 25.5 per cent then to 38.6 per cent in 2014/15 (it was 40.5 per cent in 2011/12, and is now rising again).
These sums, vital though they are for growing numbers of low-income households with little choice but to rent privately, are supporting the very rent inflation they are meant to alleviate.
Repeated studies of rent subsidies, including in the UK, have pointed to their inflationary effect on prices. There is also evidence that in areas where there are very high numbers of claimants, landlords set their rents at artificially high levels in line with the local housing allowance.
An associated problem is that the expansion of the private rented sector, supported by this arrangement, has taken place mostly at the expense of owner-occupation and social housing provision. The vast majority of landlords purchase existing homes rather than new-build. They have therefore contributed to the demand for sales, pushing up prices and helping to crowd out first-time buyers.
In ‘The Future of Private Renting: Shaping a fairer market for tenants and taxpayers’, author Daniel Bentley calls for a system of rent regulation which would exert a downward force on inflation and help encourage more landlords to channel their investments into new-build.
He proposes that:
- The private rented sector should be required to offer indefinite tenancies as the norm, with security of tenure guaranteed.
- Once an initial market rent has been agreed, subsequent increases should be subject to ceilings linked to inflation.
- Landlords who buy new-build homes should be exempted from the regulatory regime but encouraged to enter voluntary agreements along similar lines.
- Exceptions to rent ceilings be made for genuine property improvements, where a proportion of the costs could be added to the rent in excess of wage inflation.
The report challenges the received wisdom that rent regulation would send private renting into decline, arguing that the sector’s success is determined by a range of considerations, including but not limited to rent controls.
These include the wider investment environment (whether higher returns can be secured on the money markets or stocks and shares, for example) and the various government incentives available to encourage activity in different housing tenures. Most countries with larger private lettings markets have utilised both rent regulation and subsidies for building for private renting.
In the UK, the investment environment evidently suits the private rented sector. A large factor in this is the capital gains on offer to investors because of the housing shortage. This incentive would minimise landlord disinvestment in response to rent regulation.
Daniel Bentley said: “As private renting grows it is important to ensure that it offers a fair deal to those who have little choice but to rely on it.
“Unfortunately the housing benefit system, which effectively props up purchasing power at the lower end of the market, militates against fair prices by subsidising landlords’ rent demands.
“This vicious circle will only worsen as the private rented sector comes to represent an ever-larger proportion of the housing market and more and more tenants have to fall back on housing benefit.
“A system of in-tenancy rent regulation needn’t result in an exodus of private landlords, many of whom have invested to capitalise on rising house prices and are influenced in their investment decisions by a much broader range of factors.
“Either way, future landlord investment must be nudged towards new-build rather than being encouraged to buy up existing owner-occupied homes.”
The full report, ‘The Future of Private Renting: Shaping a fairer market for tenants and taxpayers’, can be accessed below.
Daniel Bentley is a former political correspondent and now director of communications at Civitas.
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Civitas: Institute for the Study of Civil Society is an independent, cross-party think tank that facilitates informed public debate on important issues of the day. It is not affiliated to any political party and receives no state funding
The Future of Private Renting: Shaping a fairer market for tenants and taxpayers