THE BLOG

Government Must Cap Rents for Social Housing to Help Boost Supply

16/01/2014 12:43 GMT | Updated 17/03/2014 09:59 GMT

Over the Christmas period Houses for Homes has been working on its business plan which focuses on the supply of a considerable number of homes for social rent around the UK.

As part of the work we have been looking at the predictions of organisations like Savilles, the Land Registry and the Housing Federation concerning house prices and rental predictions and the news is that house prices will be up 42% by 2020 while rents will have increased by more than his over the same time.

In fact the spike in rental levels will continue to climb beyond 2020 as people have to wait longer to raise bigger deposits as house prices rise.

So why, as a Real Estate Investment Trust, should we be worried about this? The truth is that government is responding to the problem incorrectly. Instead of acknowledging that the rent spiral is unsustainable and taking action to control them it is promoting a strategy that will ensure rents stay high and continue to climb. This I think, as well as being bad for tenants will not work in practice.

I asked an MP recently why there had been no attempt by Whitehall to cap rents. After all, the government wishes to reduce the nation's housing benefit spend and this would seem to be a good way of doing so.

However, the MP's response was that the Housing Select Committee had decided there is a shortage of homes to rent and that rent capping would discourage private sector investment needed to boost supply.

To me, this demonstrates a breathtaking naiveté by the committee and a lack of understanding of how real estate investors actually invest. Part of any investor's due diligence will be to ensure that they do not over supply and therefore start to see rental values fall. Real estate investors are great students of demand and supply and are well attuned to ensure they do not upset this balance. Relying on the investment market, together with high rental returns simply guarantees more of the same and that the investment will cease once rent levels fall away.

Let us make one thing crystal clear, the real estate investment sector will not lead a revolution in rents; it's not in theirs or their shareholders' interests and frankly it's not their job. It is the job of government.

The fact that Government wishes now to reduce its housing benefit spend suggests to me that they think rents are too high. However, instead of requiring those in the most vulnerable position, the claimants, to fire the bullets for them the government should take a lead. Measures to stimulate investment into rented housing, like the build to rent fund are too focused on returns and not the reductions in rent that are the object of the exercise.

The time has come for the government to place a ceiling on rents to run in parallel with measures to increase supply. Once supply has increased sufficiently for the open market to operate fairly, the restriction can be removed.

Will this put the investment market off, as the select committee suggests?

The one thing the investment sector hates more than anything else is uncertainty. In this case the uncertainty is created when you acknowledge that rents cannot continue to climb and at some point a government will have to step in and boost supply beyond that which the investment market wants to provide. This will begin to undermine the returns of those investors already in the market and the prospect of this, as the penny drops among potential investors will dissuade them.

So the price of the government's inactivity is a house of cards, a continuation of a rent spiral none of us can afford and an investment market that will see its returns reduce once the chronic under supply of housing for rent is finally addressed.