In our latest ESRC-sponsored Ask the Expert seminar, Professor Michael Oxley of the Cambridge Centre for Housing Planning Research (CCHPR) discussed the changing role of the private rented housing sector in the UK and the corresponding implications for policy.
Domestic Picture
The private rented sector in England has steadily increased to 20% of housing stock in 2015, surpassing the social rented sector in size. Given its volatile history, this growth in private renting represents a significant change in the structure of housing stock, particularly over the past ten years.
The composition of the private rented sector has also undergone some restructuring. One such change arises when the data looks at occupants: over the last decade, the number of families, as defined by households with children, within the private rented sector has grown by six percentage points to 36%, or an estimate of about 945,000 more households. Over the same period, the number of families in the social rented sector has decreased, albeit on a smaller scale by around 123,000 households.
Affordability, which is a predominant issue throughout the entire housing sector, is a problem for private renters too as they spend a larger proportion of their income on housing compared to homeowners and social renters. Professor Oxley stressed that although the average estimate of the cost of renting privately is 35% of income, this figure varies greatly and a significant number of households do spend a higher proportion.
Whist private renting is advantageous to many occupants due to the flexibility of tenure, many households struggle with problems relating to tenure security due to short-term contracts, uncertainty about future rents and rogue landlords who do not guarantee the quality of accommodation. In brief, the private rented sector is characterised by high risks to tenants and limited to no prospects of capital accumulation, especially when compared to the social and owner-occupied sectors.
Professor Oxley commented that the recent Housing White Paper summarised many of the problems which render our housing sector ‘broken’ but focused rather less on how to fix these issues. Acknowledging that private tenants spend a high proportion of their income on rent, an increasing dependency on housing benefits, and that the most common cause of homelessness is the loss of tenancy in the private sector, are all correct and welcome observations. So are government promises to encourage family-friendly tenancy agreements and to encourage institutions to invest in the housing sector and build more homes, including for private rent.
International Comparison
The magnitude of the private rented sector varies throughout the world. It accounts for a similar proportion of housing stock in France (21.9% in 2014), whilst it is sufficiently larger in the US and Germany (35% and 50.4% in 2014, respectively). While presenting these figures, Professor Oxley noted that estimates are suspect, as housing terminology such as ‘private rented’, ‘socially rented’, and ‘owner-occupied’ is an Anglo-Saxon concept, leading to data which is hard to find and potentially recorded differently.
There are four types of private rented housing. The first is a pure market allocation, where private individuals and companies charge rents as set by the market; this component is usually small in most countries. The market can also allocate housing stock owned by non-profit organisations or public bodies, which is our second category. Professor Oxley argued that this component is becoming increasingly important in Britain, but is often difficult to find in the data.
Privately owned homes which are not allocated by market forces, but rather in association to employment or family relations, is the third form of private rented housing. This type of allocation was common in Britain in the past.
The fourth kind is social allocation of privately owned homes, where investors or homeowners often receive a tax concession or a soft loan as an incentive to let their property to occupiers earning a pre-determined level of income. Under this structure, rent is limited and the quality of accommodation is assured.
Many countries have incorporated this fourth category within their domestic housing supply in order to enforce rent restrictions and income-related allocation. In the US, the Low Income Housing Tax Credit system supports some privately owned housing subject to the aforementioned limitations. Professor Oxley noted that this system is favourable across the political spectrum as its cost to the treasury is zero (as tax expenditure). The Australian equivalent, the National Rental Affordability scheme gives tax credits for the building of privately owned housing and housing owned by non-profit organisations. This scheme also applies to private investors, albeit on a smaller scale. In France, some landlords receive tax incentives, usually in the form of depreciation allowances, or soft loans. Similar depreciation allowances were also active in Germany until 2005. In the UK, there are very few examples of privately owned but socially allocated housing altogether.
As discussed above, market rents are the main pricing mechanism when it comes to private rent in England. This is also the case in Australia and the US, however there are certain restrictions on the cost of rent in each of these countries. In some states of the US, there is some element of control on rent increases for properties, as well as restrictions on rent levels and subsequent increases of rent for tax subsidised properties. In Australia, rents are kept in line with market levels and prevented from increasing in the early months of the contract.
On the other hand, private rents in Germany and France are set freely for new contracts, but rent limits are in place. In Germany, rent increases for sitting tenants are linked to market conditions only and the level of new rents is controlled. In France, rent increases are related to inflation and subsidised properties are subject to rent limits.
In comparison to other countries, the private rented sector in England tends to provide very little security of tenure as contracts are typically set for no more than six months; in many cases, contact length is two months only. The USA and Australia also exhibit relatively limited occupancy security, by design dependent on contracts, however the usual time frame is wider and varies between six months to a year.
In contrast, private renters in France and Germany have much stronger security of tenancy. French landlords offer contracts for 3 years (individual landlords) or 6 years and termination is only possible in limited circumstances. In Germany, the length of tenancy is in principle indefinite and notice periods vary between 3 to 9 months. Furthermore, leases are not affected by the sale of dwellings and, again, contract termination is only allowed depending on circumstances.
Professor Oxley’s previous research has struggled to name advanced countries in which the private rented sector is dominated by institutional investment. In England, an estimated 88% of the private rented housing stock is owned by small-scale individual investors. Individual landlords are also common in France, where they hold a staggering 96% of the private rented sector. Although the share is lower in the US, Australia, and Germany, small-scale ownership in these countries accounts for more than half of private rented stock (66%, 60%, and 62%, respectively).
The tax system in the US, Australia, France and Germany promotes individual investment. Respective capital gains taxation encourage long-term holding of rental properties. Professor Oxley argued that England has come down increasingly hard on small-scale individual ownership due to the imagery of rouge landlords and misperception of quality of accommodation and management offered by institutional investors.
Housing subsidy support across the world can be divided into three categories: object, subject, and conditional object subsidies. Object subsidies encourage the supply side of housing, in particular the construction of social housing via housing associations. Subject subsidies tend to be received by individuals rather than owners and constructors, such as housing benefits. Conditional object subsidies are most commonly found in other countries, and discussed above as the schemes encouraging social allocation in the private rented sector. Such policies are incentives for the landlord to maintain quality of the property, keep rents low, and let to tenants in the lower income brackets. In England, subsidies to suppliers have decreased relative to housing benefit and support to tenants, which have in turn risen over time.
The seminar concluded with the argument that so-called transferral of policy between countries tends not to work as domestic policy is embedded in respective history and social welfare and funding systems. However, policy-makers can always get ideas from other countries, such as borrowing concepts from the conditional object subsidies system to encourage the building of housing stock in the private rented sector, as well as to promote improvements in quality of already existing housing and influence rents and allocation mechanisms. Professor Oxley predicts that a majority of private rented housing in England is likely to remain in the hands of individual investors and that relying solely on attracting institutional investment is unlikely to solve the problems faced by the sector.
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Ask the Expert is the SMF’s lunchtime seminar series, run in partnership with the Economic & Social Research Council (ESRC).
Building on from the success of Chalk + Talk, the SMF Ask the Expert series brings the best policy output from the world of academia into the heart of Westminster.
This series of events is aligned with current government consultations and parliamentary inquiries, giving policymakers the opportunity to engage with experts in those policy areas.
To suggest a subject for a future Ask The Expert event, please contact the SMF’s events officer Hannah Murphy via hannah@smf.co.uk.
