Tuesday, 21 October 2014

Private rents 'unaffordable' in most of country

Average rents in the private sector are unaffordable for ordinary working families in more than half of local authorities in England, research shows.

The housing and homelessness charity Shelter released findings from its rent watch which showed that in the majority of councils, typical rents from private landlords were over a third of average take-home pay.

Rural areas are among the worst hit with findings showing that it is now more affordable to rent in Manchester, Liverpool or Birmingham that it is to rent in north Devon, north Dorset or Herefordshire.

London boroughs were the most expensive, with the average rent for a two bedroom home at £1,360 – almost two and a half times the average in the rest of the country (£568).

The least affordable local authority area outside London is Oxford, where typical rents account for 55 per cent of average earnings.

Shelter is calling on the government to take urgent action to stabilise the private rental market and develop policies to bring rents in line with average earnings.

Campbell Robb, chief executive of Shelter, said: ‘With huge differences in affordability across the country, there are now worrying signs that families are likely to be displaced by our out-of-control rental market.

‘Over recent years we have seen more and more people forced into renting, as high house prices and a lack of social housing have made it the only option for thousands of ordinary families.  

‘What we’re seeing now is that renting is no longer the easy, cheap alternative to home ownership.

‘We have become depressingly familiar with first time buyers being priced out of the housing market, but the impact of unaffordable rents is more dramatic.

‘With no cheaper alternative, ordinary people are forced to cut their spending on essentials like food and heating, or uproot and move away from jobs, schools and families.

‘With rural areas suffering just as much as cities - or in many cases, even less affordable - it’s no longer enough to encourage people to move out of crowded urban areas.

‘Government must urgently consider how private renting can become a stable, affordable option for families, and not a heavy financial burden that makes parents choose between buying food for their children and paying the rent.

‘This should be the wake-up call needed to finally take action to address our renting crisis.’


Readers' comments (81)

  • BlokeWithAConscience

    Proves what many of the sensible posts have been saying for a long time -the need for private rent caps in a broken housing market. Astonishing then that some peculiar posts have continually backed MV instead of rents that people can afford in social housing as the way forward! Yes it is the way forward if you are a greedy landlord.

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  • Jono

    I agree "the whole idea is to move away from dependency and state support, not towards it". That is the point I am making - rents have become unaffordable in part because HB effectively boosts the size of the market for rent. It creates demand where otherwise there would not be demand.

    Market rent in a free market would entail people renting according to what they are both willing and able to afford. This is the only relevant principle. Answer me this - if more people refused to pay the asking price and demanded a discount, because they could not afford to pay the asking price, landlords would reduce the rent or suffer lost income.

    It is because Landlords can find people who are willing to pay the rent demanded (even if above 35%), and who are able to (with trade offs in other respects), that rents are as they are.

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  • F451

    But previously the argument has been that there is not much scope for landlords reducing rent - they only charge what they need to to pay the costs and make a return.

    Now, it seems they do have scope to reduce rents because nasty HB is the thing making them charge higher rents.

    So which is it.

    Are landlords exploiting the HB system to make higher profits from excessive rents, or

    Landords are charging those rents because it is what they need to cover their costs and make a living.

    Which way are you arguing it today Jono?

    Meanwhile - capping rents (using the scope within the level of rents being charged for lower rents to be charged) moves us away from benefit dependency, lowers benefit costs, and (within your own definition) readjusts the market by correcting the demand equation.

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  • Jono

    Let me make it as plain as I can.

    Let's say in a hypothetical market there is £100k per unit on average demanded for 1,000 units, so the market size would be up to £100m. Now if the amount offered was £100k per unit on average, the amount offered would equal the amount demanded and the market would clear at £100k per unit.

    Now let's say the amount offered was made up of £80k per unit paid privately, £20k per unit is paid as subsidy on average making up £100k. Then the subsidy is removed. So the total amount offered is now £80m, or £80k per unit. This means that the prices of units, on average will decrease to a maximum of £80k because it is impossible for the market to clear at a higher price.

    The question is what options are available to landlords in the private rented sector, who effectively face the above dynamic?

    1. Sell off their homes - increased supply of homes for sale will drive down prices to a market clearing level - home ownership becomes a possibility for more, and due to the correction in house prices, the risk of lending reduces. The increased demand for home ownership would then ease demand on private renting, contributing a further downwards pressure on rents.
    2. Reduce rents - making their homes accessible to more people in the market place, but guaranteeing income flow to the landlord, albeit at a reduced level. However his assets are protected.
    3. Leave some properties empty - the landlord has to pay for the costs of maintaining the property but this now has to come out of the rents collected on other properties, effectively reducing his income. Or he could neglect the property and reduce the value of his assets as well as increase future costs of improvements. Neither would be rational.

    So you see scrapping HB would lead to lower private rents, and possibly higher levels of home ownership. The extent of the pain over time in the transition from here to there reflects the extent of meddling by the Government to try and improve matters. But failing.

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  • There are a number of flaws in lots of arguments here.

    A lot of the Private Rented Sector is not targetted at the, can I say, lower end of the market. Much is, but an awful lot is not. It aims at those who are renting for many other reasons, while their own housing is being refurbished, while they are in mobile jobs, and even in the current market while house prices are falling and they have banked a previous profit on the sale of their houses etc. To these people, they will pick the sort of property suitable to their needs - maybe towards the higher end of the market, especially if in receipt of housing allowance from their employers. These properties need removing from any market rent statistics about amounts charged.

    To those in receipt of LHA, their rents are regulated by the maximum LHA payable - and as we see with university fees the 'maximum' soon becomes the 'minimum' chargeable by all, including such former colleges of Higher / Further Education who have achieved University status offering degrees in Hairdressing, Media Studies etc.

    Any 'rational' solution would simply reduce the LHA payable. As is put above, landlords will simply have to reduce their rents accordingly. There will be some problems - family of 10 made homeless by uncaring landlord, but it's the only way to force the market down.

    As to the real distortion - as long as London Weighting is payable, then the system will remain flawed. Those of us who do not live in Roseland have very little sympathy - if you receive enhanced salary, then pay. If not, then move. Eventually employers will realise that their continued source of cheap labour is elsewhere and move their businesses accordingly (much to the chagrin of their Directors and their wives, but Harrods do offer a delivery service).

    It sounds harsh, but the current housing market is flawed by conflating social / affordable housing tenants with market renters and allowing landlords to abuse the situation (with or without contrivance from their (extended) families).

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  • F451

    Is there anyone else out there who previously claimed that landlords could not possibly afford to lower their rents, that they had their loans to repay, that they had to make a living - and are now saying that it is a absolute certainty that capping benefits will lower rents.

    How will this happen - how have these same landlords suddenly become able to cut the rent that these posters previous claimed could not happen.

    Cut the crap, cut to the chase - cap the rents. All the effects argued, reducing housing costs, reducing benefit cost, increasing responsibility through decreasing dependency are all ensured by capping rents - they are only hoped for by capping benefits.

    Neil - your upper end of the market traders need not be effected, all they need do is work on their contracting or use the same exclusions that exist in the current legislation for regulated rents - their nightmare scenario is just fantasy, unless they enter into it voluntarily, and why would they do that.

    Jono - again, can you not see that you are arguing that landlords can now afford to cut their rents - in which case all the nightmare scenarios of their having to do so were either wrong,or made up.

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  • To whom it may concern

    It appears that every time a report like this comes out, rents go up. Or is it that they go up each month anyway.

    Maybe the landlords are just making the most of it before they all fall into line and reduce their rents like Mr Shapps says they will - but then there have been 3/4Million houses kept empty consistently for years, and somehow the owners afford to keep them that way.

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  • >>Chris.

    Re-read my post. I'm on your side - what I have said is that the full market private sector rent should be excluded from computing 'averages' / 'means' etc. They should be irrelevant to calculations which are therefore skewed.

    Personally, I would like to see EVERY private landlord who is charging LHA via tenants to the Housing Benefit account, being checked by HMRC to see that every penny of LHA received is accounted for in gross income before tax is calculated.

    Your personal implied slight is beneath you. I've already said before I'm willing to produce any accounts needed for the 1 property which I rent out.

    Once again you immediately react and assume that anyone who has looked at the issue slightly differently is wrong. Even Jono is quoting relevant figures which are worthy of consideration mathematically. HB or to be more accurate LHA has distorted the issue - too many landlords are setting their rent to LHA tenants at the absolute maximum. There are effectively rent controls - the problem is that they are set too high! Re-read my post and make a sensible conclusion.

    As usual, I have no intention of prolonging this discussion and risk boring everyone else.

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  • Jono

    F451 - Rent Caps were one of Red Ken's worse proposals, back in 2010 (no wonder Blue Boris got elected).

    I don't normally copy articles in full, but this is just too good an illustration of why capping rents is wrong:

    Plan to cap private rents is flawed, say mortgage experts
    Tuesday 5th October 2010
    Ken Livingstone has said he will cap private sector rents throughout London if he wins the mayoral contest.

    He would not allow tenants to pay rents higher than landlords pay for mortgages.

    Livingstone said: “Tenants should not be paying more on the rent than it costs to have a mortgage on the same property. I would cap the rents. We want to have rent control.”

    But Labour’s mayoral candidate seems ignorant of the widespread requirement among buy-to-let mortgage lenders that rent should cover 125% of monthly repayments.

    Brian Murphy, head of lending at the Mortgage Advice Bureau, said: “Most BTL mortgages are assessed / determined on a formula that requires the rental income to be significantly more than the expected actual rent that the property will achieve. This is typically 125% of the monthly rent, and can be 130%.??

    “Some lenders’ BTL formula are determined not on the initial rate of interest that the borrower will be repaying on the actual mortgage product but on a notional rate or reversionary rate, often the rate that the product will revert to once any initial rate has ceased. Therefore any plans to cap rents to the level of the mortgage payment are likely to result in potential or existing landlords being unable to obtain the financing that they need to provide much-needed private rented property.”

    Jonathan Samuels, CEO of Drawbridge Finance, said: "Ken Livingstone's proposal for capping rents at mortgage repayment levels is impractical and goes against free market economics.

    "Landlord demand would fall as yields would be too low to cover on-going maintenance and other costs. Property prices, currently under pressure, would inevitably fall as demand for investment properties would drop. This is not to mention that getting mortgages would be impossible, as lenders generally require rents to cover 12% of the mortgage repayment.

    "If he wants to send the property market into a nosedive, this would be the way to do it!"

    http://www.introducertoday.co.uk/news_features/Plan-to-cap-private-rents-is-flawed-say-mortgage-experts

    I'm not arguing that Landlord's can afford to cut their rents. Only that rents are, in a free market, determined by the interplay between supply and demand. This interplay is based on the landlord being willing and able to supply one of his homes in return for an agreed rent, and the tenant being able and willing to pay the agreed rent in order to live in the landlord's home. Private rented housing is based on a strong principle of fairness actually.

    Too many landlords are demonised as being greedy and exploitative, when I suspect the majority provide a good service.

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  • Jono

    More on rent caps for anyone not yet dissuaded:

    "The Effects of Rent Control

    Economists are virtually unanimous in concluding that rent controls are destructive. In a 1990 poll of 464 economists published in the May 1992 issue of the American Economic Review, 93 percent of U.S. respondents agreed, either completely or with provisos, that “a ceiling on rents reduces the quantity and quality of housing available.”1 Similarly, another study reported that more than 95 percent of the Canadian economists polled agreed with the statement.2 The agreement cuts across the usual political spectrum, ranging all the way from Nobel Prize winners milton friedman and friedrich hayek on the “right” to their fellow Nobel laureate gunnar myrdal, an important architect of the Swedish Labor Party’s welfare state, on the “left.” Myrdal stated, “Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.”3 His fellow Swedish economist (and socialist) Assar Lindbeck asserted, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”4 That cities like New York have clearly not been destroyed by rent control is due to the fact that rent control has been relaxed over the years.5 Rent stabilization, for example, which took the place of rent control for newer buildings, is less restrictive than the old rent control. Also, the decades-long boom in the New York City housing market is not in rent-controlled or rent-stabilized units, but in condominiums and cooperative housing. But these two forms of housing ownership grew important as a way of getting around rent control.

    Economists have shown that rent control diverts new investment, which would otherwise have gone to rental housing, toward greener pastures—greener in terms of consumer need. They have demonstrated that it leads to housing deterioration, fewer repairs, and less maintenance. For example, Paul Niebanck found that 29 percent of rent-controlled housing in the United States was deteriorated, but only 8 percent of the uncontrolled units were in such a state of disrepair. Joel Brenner and Herbert Franklin cited similar statistics for England and France."

    http://www.econlib.org/library/Enc/RentControl.html

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