Financial Markets: Stability

Lord Young of Cookham Excerpts

Thursday 3rd November 2022 Lords Chamber

[Lord Young of Cookham (Con)]

My Lords, I very much welcome this timely debate, introduced by the noble Lord, Lord Sharkey. While the economy has been centre stage for the last two months, we have not debated it since the summer—apart from the 40-minute Statement on 19 October. I join others in welcoming my noble friend Lady Penn back to the Front Bench, this time as a fully-fledged member of the Treasury team.

I want to focus on the final element identified in the noble Lord’s Motion—the rental market and, in particular, the private rented sector. I suspect the noble Lord, Lord Best, will also do this. There is a vicious circle operating here. Rising interest rates with earnings lagging inflation are making home ownership less affordable. This adds to demand for private renting, pushing rents up. This is reinforced by cost pressures on landlords, as buy-to-let mortgage rates increase, with less advantageous tax arrangements and higher environmental standards. This in turn leads to landlords leaving the market, leading to a further imbalance between supply and demand and yet higher rents. Too many renters already pay more than 50% of their income in rent, making home ownership less attainable. The ONS notes:

“Given the excess of demand over supply, rental prices are expected to rise further.”


In September this year, Rightmove reported annual growth in rents of 12.3%.

One in five households now lives in private rented accommodation—a doubling in two decades—and nearly all are on six-month assured tenancies. The theme of the noble Lord’s debate is stability. I believe we need a fundamental review of the private rental market to put it on a more stable and sustainable basis. In a nutshell, we need to move from a market dominated by the small private landlord, buffeted by tax changes and interest rate movements, where tenants have limited security of tenure and where it is not their tenure of choice, to a market more like that of France, Germany or Switzerland. There, a higher proportion of the population see private renting as the “normal” tenure choice and financial institutions invest in the sector for the long term, ensuring that properties are professionally managed and in good condition and, crucially, have long leases to provide stability for the tenant.

This is not to say there is no role for the private landlord, but the sector as a whole needs to be put on a more stable long-term basis. There are signs that this transition is taking place here. Institutions such as Legal & General have started building thousands of flats for rent, targeted at students, professionals living in cities, and those who need mobility for their career. But we need to accelerate the transition and broaden its base. Build to rent is only 5% of the rented market. This would be a good investment for pension funds. Historically, they have invested in equities, gilts, commercial property and fixed interest loans, but they have had little direct exposure to the residential property market. This is perverse, as it has consistently outperformed equities.

To make the transition happen smoothly, we need to understand the motives of private landlords. They invested in buy to let for two main reasons: capital appreciation and a buoyant income. In many cases, they preferred this over a pension. But the disadvantage is that their capital is illiquid and owning property brings with it management problems and the prospect of a tougher regulatory regime.

To facilitate this transition, what is needed is a quoted housing investment trust to whom landlords could sell their property not for cash but for shares in the trust. So the investor would retain his investment in residential bricks and mortar—the trust’s only asset—with an income stream linked to rental values and capital values rising over the long term, but without the hassle of management and with easy access to capital. The property could be sold to the trust without giving notice to the tenant as it would be held as an investment.

The process could start with blocks and properties in a specified area, with management undertaken by registered social landlords such as housing associations, giving further reassurance to tenants. There would be a role for the Treasury to play in helping the transition to get off the ground. Normally, when a private landlord sells, capital gains tax is payable, and this could be a deterrent. However, under the scenario I have outlined, if capital gains tax was deferred until the shares were sold, that would act as an incentive.

I put this proposition forward to provide stability to a sector that is the least stable form of tenure in the housing market. I do not ask for immediate adoption today, but it would be good if the Minister could give it a nudge by encouraging the Department for Levelling Up, with its new Secretary of State, to explore further the potential of the idea I have just floated.