Housing: Rented Sector

Baroness Scott of Needham Market Excerpts

Thursday 12th July 2012 Lords Chamber

[Baroness Scott of Needham Market]

My Lords, I am grateful to the noble Baroness, Lady Rendell, for securing today’s debate. Her commitment to this issue and to Shelter in particular is well known. Her passion, conviction and knowledge have been much in evidence this afternoon.

I will focus on questions of how the private rented sector is provided for, financed and regulated. First, I ask the Minister a few questions about the overall supply of housing. For some years, it has become apparent that the supply of housing is not keeping up with the growth of formation of households. While arguments about whether housing should be for owner-occupation or social or private rent are valid, unless we increase the size of the cake we end up creating new problems elsewhere. Can she say something about overall housing numbers and particularly how government are planning housing growth now that top-down targets have been removed?

What progress is being made to deal with the issue of empty homes, estimated last year at 720,000 across the country? What is the Government’s policy towards conversion and change of use back to residential? High streets are shrinking,and this is not just a short-term problem caused by the recession. There is an underlying issue caused by the huge growth of online shopping. Areas where many shops are boarded up would probably benefit from a change of use.

When I was first elected on to Mid Suffolk District Council more than 20 years ago, my children were still quite young. Neither as a mum nor as a councillor did I come across many families who lived in private rented accommodation. At that time, it seemed to be the preserve of young people, or of people in some temporary situation. On the whole, families seemed to be living in either owner-occupied properties or social rented housing. I wondered whether this was some false rosy memory on my part, but in researching for today’s debate I found the Treasury figures that showed that 1991 was the lowest point for the private rented sector.

The English Housing Survey, published last week, has shown that the private rented sector has just reached parity with social rented housing. Each has a 17% share. There are now 1.1 million families living in the private rented sector and, according to a Cambridge University study, the number of families with children in the sector has risen by 86% in the past five years. The Rugg review, although carried out only in 2008, is already vastly out of date. It simply did not envisage this rise, and it needs to be re-evaluated.

Does that matter? In one sense, it does not. What really matters is having secure, affordable and decent-quality homes for families, but the trouble is that we know that you are much less likely to have that if you are living in private rented accommodation. For many families, for all those reasons, it is not an option they would choose, but they take it because they have been priced out of owner-occupation and cannot get social rented accommodation.

Affordability is a key issue. Tenants have to find a deposit, a month’s rent in advance and fees for letting agents. It is bad enough if you are trying to do that every five years or so, but in a volatile market people are often having to do it every year. Rents are high relative to the incomes of people in the private rented sector. The English Housing Survey estimates that the cost of housing accounts for 19% of the weekly income of owner-occupiers and 43% of the income of those in the private rented sector. Those figures need to come with a little warning, because the figure for owner-occupation is averaged out and includes those who have small mortgages because they have owned for a long time. Nevertheless, the figures are stark.

In its 2010 report, the Treasury referred to rents being 24% to 40% cheaper than a mortgage on an equivalent property and concluded that renting is a more affordable option. I think that the Treasury is living in cloud-cuckoo-land. It must look at affordability relative to income, not the cost of buying a similar property.

Tenant satisfaction in the private rented sector is much lower, and we all know the horror stories about poor quality accommodation, failure to deal with even serious and life-threatening problems and rogue landlords in general. On top of this, the high turnover rate means that families have little sense of permanence,with all that that means for the education of their children and their general well-being. Concentrations in certain areas mean that there are localities where a significant proportion of residents have no real stake in their area.

We make a big mistake if we think that the growth of the private rented sector is a blip caused by a temporary lack of social housing and the unavailability of mortgages. These problems are here to stay, and so is a more mobile population in an increasingly flexible job market. The Joseph Rowntree Foundation recently published a study about housing and young people which showed that by 2020, 1.5 million more young people will be going into the private rented sector, most with their own tenancy and the rest living with their parents, as we have heard. These young people will very soon become parents, so the number of families in private rented accommodation will also increase.

We cannot continue to think about the private rented sector in the rather piecemeal way that we have in the past. I recognise that organising a sector dominated by individual landlords is difficult. Seventy-four per cent of properties in the sector are in the hands of individuals, and two-thirds of them own fewer than five properties. Nevertheless, local authorities, in their planning and social roles, need to think about how they can engage with the sector. The Treasury needs to think about smarter incentives. Changes to stamp duty have been welcomed, but measures are needed to encourage new building in the sector. It can and should be made conditional. There are schemes in France and Germany which offer tax breaks, but only in exchange for longer, more stable tenancies. Chris Norris from the National Landlords Association recently wrote that a third of his members would be happy to employ tenancies longer than 12 months. Will the Government look at how that might be encouraged and, in particular, work with mortgage lenders, who often will not permit people to let for more than a year?

I know that there is a perception that rents are being driven ever upward by greedy landlords, and having seen what people are asking for accommodation during the Olympics, I am sure that they exist, but I am not convinced that it is such a golden goose because if it were, there would not be such a shortage. I think the truth is rather more complex. Landlords have relied on a combination of capital gain and rental income to give good returns, and that model has broken down. A recent article in the Investors Chronicle suggested that returns on buy to let are currently about 3% to 4%, which is too low to justify people investing when you think about all the work and risk involved.

The idea of rent control is very popular with tenants and the public, which is not surprising, but evidence from around the world suggests that it simply drives down quality and is being removed. Other forms of regulation appear more successful. LSE research points out that most European countries have regulation without limiting the amount of accommodation available. In Germany, the private rented sector accounts for more than 50% of all housing. There is growing support for the notion of accredited landlords, so perhaps the Government could look at that on a more systematic basis.

I have long thought that the obscenity about housing benefit is not its amount but that taxpayers’ money is used to pay bad landlords for poor accommodation. Institutional investment in the UK housing market is low because investors tend to get better returns on commercial property. The current returns in the residential sector of about 3.5% fall well short of the 6% to 7% that investors require. Real estate investment trusts were launched with a fanfare in 2007 to provide a tax-efficient investment vehicle for large-scale housing for private rent, but they failed to meet expectations. Companies such as Aviva have dipped a toe in the water, and there is a view that property unit trusts might be a better vehicle. Sir Adrian Montague is currently reporting on this aspect of private rented accommodation. When can we expect his report?

Other barriers to institutional investment have been identified. They include difficulty in finding sufficiently large investments—about 200 properties are needed. This is where working with planning officers and authorities might also come in. In addition, the sector lacks the housing management skills needed to run such schemes. Is there a role here for housing associations to offer a commercial service, managing the properties and generating profit that they can then reinvest in their social housing?

The private rented sector has now become far too important to be left to chance, as successive Governments have done. I look forward to hearing from the Minister today but also to some action in future.