Wednesday, 04 March 2015

A housing timebomb

From: Inside edge

The big shift from owning to renting revealed in the census has potentially massive implications for government spending on housing costs.

The headline results revealed by the Office for National Statistics last week were that home ownership fell from 68.3 per cent of households if England and Wales in 2001 to 63.5 per cent in 2011. Private renting increased from 9 per cent to 15 per cent and social renting fell from 19.3 per cent to 17.6 per cent.

However, within that total for home ownership, the proportion of households owning outright actually increased, so the really significant change was the fall in the number buying with a mortgage from 8.4 million (38.8 per cent of households) in 2001 to 7.6 million (32.7 per cent) in 2011.

As I highlight on my other blog, if mortgaged ownership had maintained its 2001 share of total tenure, there would now be an extra 1.4 million households with between one and ten years on the housing ladder. Instead they are tenants, mostly of buy-to-let landlords. The number of outstanding buy-to-let mortgages in 2011 was – by complete coincidence of course – 1.4 million. I also have more analysis of the overall trends in tenure, including the areas with the highest and lowest owning and renting.

In this blog I want to concentrate on two long-term consequences of this change.

The first is obviously the growth of the private rented sector beyond what might be considered its traditional role as a flexible housing option for the young. As research by Shelter – and last week’s Labour policy paper – highlighted the sector is now home to more than a million families with children and its short-term tenancies look increasingly ill-suited to people who need long-term stability.

At the same time, the government appears to want an increase in private renting financed by pension funds and institutions along the lines recommended by the Montague report. So with mortgage lending constrained and social housing investment in short supply, further growth in private renting looks inevitable. Many housing associations are seeing an opportunity for expansion by applying professional management standards to a portfolio that can be used to diversify their business and cross subsidise their affordable housing. And changes to the homelessness legislation will create expanding demand for private rented homes for homeless families from local authorities.

Which brings me to the second long-term consequence of the change in tenure. Expanding home ownership has formed a key part of moves towards asset-based welfare over the last 20 years. Owners have an asset to fall back on later in life. Once they have paid off their mortgage, their only housing costs are council tax and repair and maintenance, and when it comes to long-term care or income in retirement, the equity in their home is a potential source of income.

In contrast, renters not only have no asset to fall back on and use to pay for their care or living expenses, but they also have to continue to pay rent in retirement.  Unless they have built up substantial pension assets – and all the trends are against this too – that means the state will have to step in and help with housing benefit. The more private renting continues to grow, the higher that housing benefit bill will be.

The census confirms that home ownership is shrinking and so is the scope for asset-based welfare. A report by the Strategic Society Centre in the summer highlighted this issue alongside the long-term growth in the number of pensioners from 12.6 million now to 15.9 million in 2020 and 18.8 million in 2060 (when today’s 20-year-olds will be over 70).

In 2009/10, 1.5 million pensioner households received housing benefit and up to another 390,000 were entitled to claim but did not do so. They claimed an average of £69 a week at a total cost of £5.3 billion.

The report projected that by 2060 around 40 per cent of pensioners – 7.5 million  – will be renting and that around half of them will receive housing benefit. It put the total cost of pensioner housing benefit in 2060 at £13.4 billion or £8.1 billion a year more than now.

However, even that projection was based on some very conservative assumptions about tenure and rents. For a start, it was based on a forecast that home ownership in England would fall to 63.8 per cent in 2021. Last week’s Census revealed that it was already lower than that in 2011.

As things stand, home ownership looks certain to fall even more over the next ten years.  A report for the Joseph Rowntree Foundation in June warned of a looming housing crisis with an extra 1.5 million under-30s forced into private renting by 2020. Another out today from the Building Societies Association says that one in four prospective first-time buyers believes that it will take them at least 10 years to save a deposit.

Second, the estimate was based on the same £69 a week average pensioner housing benefit claim as now.  While that allows a comparison in today’s terms, it does not reflect the continuing shift in tenure within renting. About 11 per cent of current pensioners receiving housing benefit rent privately compared to 28 per cent of non-pensioners. If the shift to private renting (and even within social housing to higher rents) continues, the proportion of pensioners paying higher private rents looks set to rise significantly in the longer term and so does the housing benefit bill.

So that projection that the housing benefit bill will rise by 40 per cent as a result of changes in tenure and demographics is likely to prove a highly conservative estimate. Faced with those kind of numbers, what should the government do?

The Strategic Society Centre argued for ‘aggressive steps to increase rates of ownership’: ‘Since declining rates of home-ownership will have severe fiscal consequences in the long-term, policymakers should therefore explicitly target the highest possible rates of owner-occupation consistent with economic stability (i.e. a lack of “housing bubbles”, or high-rates of foreclosures) and labour market flexibility. In short, policymakers should not be neutral to tenure. Higher rates of home-ownership are ultimately cheaper for the taxpayer.’

It added that policy makers should also look at over-consumption and multiple ownership of housing including second homes and buy-to-let investment. As I argued on my other blog, the census results show less a fall in home ownership than a fall in owner-occupation. Many of those 1.4 million buy-to-let mortgages are being paid by people who see their investment as their pension. Far better, surely, to come up with incentives for pension investment that do not push up house prices and leave the taxpayer to pick up much of the long-term bill. Alongside the increases in housing supply now supported by all parties, the job of government would be to strike the right long-term balance between tenures.

The looming housing timebomb should also mean increased investment in genuinely affordable housing and intervention in the private rented sector to go with measures to make it easier to get on the housing ladder at affordable prices. There is a debate to be had about whether that should just mean increased regulation and greater security or rent control too but it is one that is needed urgently. 

The complete opposite, in other words, of what we currently do: short-term schemes to boost ownership for a few that just increase prices and make it less accessible for everyone else; laissez-faire policies for the private rented sector; and the slow death of social housing.

Oh yes, and squeezing entitlement to housing benefit, first for the under-25s, then for the under-35s, then for private tenants, then for social tenants. So far pensioners have been protected from any cuts – but for how much longer if nothing changes?

Readers' comments (15)

  • So, how do they overcome this issue on the continent with traditionally long standing high levels of renting?

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  • Jules Birch

    Good point Chris - I think falling home ownership plus high rents and house prices is the problem. Germany has higher levels of renting but more affordable prices and rents - and security of tenure. Our higher prices and rents may benefit existing owners and landlords but there is a long-term cost attached to them.

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  • and we have caused this problem over time fiddling with the market and over promoting owner occupation which people have gone for who would not normally have done so without the incentives and the expectation of investment value. The market in Germany and on the continent more widely has chugged along without this interference. Our situation is one which needs correction... not sure how the problems Jules identifies can be corrected however as cannot run the clock back or change peoples perceptions or prejudicial views about tenure type and their occupants... Invisible tenure is the only way forward in my view :-/

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  • Joe Halewood

    Jules, a key issue with the move to higher levels of private renting is the HB cost.

    We currently pay on average £25.20 more per week to a private landlord than a social one in HB. With 1.65m private tenants claiming HB this is £2.2bn per year more we, the taxpayer pays each year to private landlords than we do for same properties with a social landlord.

    £2.2bn MORE - and we pay social housing initial 'subsidy' of £1.2bn per year so this ongoing revenue 'subsidy' to private landlords is almost double the 'subsidy' social housing receives.

    In Nov 2008 when LHA began we had 1.06m private tenants in receipt of HB, now it is 1.65m a huge increase of FIFTY SEVEN PER CENT.

    For social landlords the figure has increased from 3.11m to 3.39m an increase of just NINE PER CENT in that time.

    The equation is simple, the more tenancies rented from private landlords the greater the public purse cost and a 57% increase in less than 4 years is a huge drain on the public purse.

    In just over 3 years the numbers of tenants renting privately

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  • Colin Wiles

    Chris A switch to renting in this country, as in Germany, would be fine if rents were comparatively low and house prices were stable or falling. German house prices have fallen by 30 percent over the past 30 years, so rents are comparatively low and people can invest their spare cash in pensions, stocks etc, whereas here people have no surplus cash because so much is swallowed up by rent. It all comes back to land and our failure to release enough land for new homes.

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  • Good point Colin regards Germany and people there investing spare cash in pensions and stocks.

    Highlights the structural weakness of the UK economy where we seem to concentrate on assest / capital based investment (e.g. housing) rather than investment in consumption focussed activities (production of goods) that will improve economic performance which will have wider social benefits (more jobs).

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  • Good Article Jules /Colin and last but not least Frances-this topic should really be main focus for 2013- will the inevitable and overdue crash in House prices kick in?
    lets not forget that the birth of social housing came about due to the total failure of the PRS when it had 90% market share

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  • There is very little job security in Germany - hence the 4 or 5 mini jobs many people have.Security of tenure is always contingent on paying rent - and without a job you are evicted in any country!

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  • Joe Halewood - with social rents having quadrupled in past 20 years - versus only a doubling of private rents - the real ogre in HB terms is the SRS, not PRS. Even allowing for rent differentials - around 60% of HB goes to SRS - in effect back to Treasury!

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  • Looking at German net incomes versus rent for a 3 bed apartment in non City centre location - cost seems to be close to 50% of net income - pretty similar to UK!

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  • Joe Halewood

    Trevor Rowlands at 12.05pm above - PRS has 32% of all HB claimants yet receive 39% of all HB income in latest figures for August 2012

    In Nov 2008 when HB records go back to we see PRS had 25% of all claimantsand they received 33% of HB spend.

    So we see in less than 4 years the number of HB PRS claimants rising 57% and their share of the HB pot increasing by 32%

    I would be genuinely interested in how you arrived at your statement that SRS rents have quadrupled and PRS rents only doubled in 20 years. However that does not detratc at all from the fact we pay PRS landlords £2.2bn per year more for the same number of properties than we do for thhe SRS.

    Many inferior proprties all with less security of tenure all with much higher disincentives to taking up employment and all in all a much more inferior product and service.

    This £2.2bn per year revenue subsidy is almost double the total subsidy the SRS receives and this government wanted to rename the taxpayer subsidised sector!

    The same government who said we will reduce HB by £2bn when entering office and now its £4.85bn above that target and Cameron said yesterday "...and even under our plans HB will increase!"

    This is more than HB taking the strain (and that strain is the PRS not the SRS as the above official facts show) it is a case of political doublespeak and duplicity - blame and label SRS but do nothing about the real cash cow - the PRS

    That timebomb is set only to increase given the void created by lack of new SRS development is largely filled by the PRS, just as it has been for many years resulting in this £2.2bn extra cost to the taxpayer for an inferior good and service

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  • Joe - I know in Surrey from first hand experience that since 80s council rents have increased by about 7% pa compound - doubling in 10 years - quadrupling in 20 years.

    If this differs from national average I will happily stand corrected and revisit my extrapolations...

    Min interest is looking at total taxpayer subsidy for each of SRS & PRS - noting that building/maintaining social housing has a cost which is never mentioned when the popular BTL bashing goes on.
    You are in agreement that 61% of HB goes to SRS as I suggested - so in absolute terms most returns to Treasury, by circuitous route

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  • Chris B, I am not sure they do cope on the continent, not in all areas anyway. In parts of Italy (especially the south) rent levels are similar to levels here, however people typically have lower incomes. Affordable housing is extremely limited and social housing is almost unheard of. It’s normal for children to stay at home for much longer than is common in the UK and families often live in flats that would be classed as statuary overcrowded by our laws.

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  • Chris M, - LAs for many years now have treated all living rooms plus kitchens(if certain min size) as bedrooms. A typical 2 bed 1 reception flat is thus treated as having 4 useable bedrooms - purely from overcrowding standpoint. It has no bearing on LHA/HB. I assume this is an inevitable response to finite stock - versus growing families in each unit.

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  • Trevor-about to dispose of old rent book that my father used, I notice that in October 1994 the rent for ** **** *** was £57.50 per week. The current rent is £118.97 per week.

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