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The Government Needs A Bigger Vision For Renters

Reform of the Buy to Let market needs to go hand in hand with a bigger strategy for Build to Rent so that secure, stable, good quality homes are available to those who need stable, comfortable, affordable homes.
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There is no silver bullet to solve Britain's housing crisis. Building more homes is vital, of course - and last month's Autumn Statement has been widely welcomed for its measures on housing supply, including £7.2 billion for housing and infrastructure. But supply alone is not the solution to the complex web of housing challenges we face. That's why other measures that escalate the Government's reforms of the private rented sector (PRS) are at least as important. When taken together with previous announcements, these will have a much more immediate impact on the 10 million people renting privately.

The PRS is central to understanding the challenge that ministers face in tackling the housing issue. The number of private renters now tops 10 million following a decline in social housing stock, and this is only likely to increase with sustained house price rises (an increase of 7.7% in the last year alone) far outpacing sluggish wages (wage growth is hovering at just above 2% annually). The problem is that conditions in the PRS are significantly worse than all other tenures; security of tenure is a rarity, with the average tenancy lasting around two and a half years; and wealth inequalities are widening as those priced out of buying a home spend an increasing proportion of their incomes on renting.

Many of these issues can be traced to the structure of the market, which is dominated by amateur and semi-professional Buy to Let (BTL) landlords - 89% of landlords are private individuals. It's clear that over the last few years ministers have increasingly - and rightly - seen the market as in need of reform. Concerns about Soviet-style intervention have given way to an acceptance that improving regulation in places, reorienting and 'professionalising' the market in others, and looking at improving supply are all ways to make life better for the squeezed middle.

In the last parliament we saw efforts to tackle rogue landlords and improve conditions, such as legislation to tackle retaliatory eviction. Now ministers appear to have fully grasped the nettle. The Stamp Duty Land Tax levy on Buy to Let purchases was a radical step by the last Chancellor, and along with an end to tax relief on mortgage interest for Buy to Let investors - put a brake on investment, and has already had a significant dampening effect on the market. In April, when the levy came into force, sales dropped by 45% and landlord confidence fell to an all-time low.

The new Government has continued this agenda by banning letting agent fees in the Autumn Statement. With average costs of £300-400 and the average tenant moving every two and a half years, this is a significant boost for living standards and will empower tenants otherwise stuck in poor conditions. And the Treasury has given the Bank of England more powers to restrict BTL lending.

The key is to look at these reforms from the point of view of an average BTL landlord's business model, which is unlike that of other investors in that yields and capital gains are not at its heart. Instead, it relies on rental income being high enough to cover mortgage repayments - and over a couple of decades the mortgage is paid. Taking on letting agent fees, facing additional borrowing costs as lending is restricted, paying the Stamp Duty levy, losing tax relief and operating within a tighter regulatory environment make BTL investments a much less attractive proposition.

With the financial model making less sense for BTL investors, we need to ask what sort of private rented sector we want to build in their place. It makes sense to focus on replacing rental stock lost as BTL landlords leave the market with new Build to Rent developments led by institutional investors, such as Legal & General. Institutional investors can provide security of tenure for tenants; newer stock means better conditions; and a private sector-led approach reduces the cost to the public purse. Moreover, the Build to Rent market is essentially a new one and does not compete directly with other forms of new housing supply. That means it can play a big part in meeting our overall housebuilding needs. But while the Government has made encouraging noises about building across tenure types, and introduced different initiatives to support Build to Rent, the SDLT levy and changes to commercial taxation are making it difficult for a sector still in its infancy to grow at scale.

I suspect that over time these policy issues will be ironed out. If they are, we face another problem. The Build to Rent sector has a different business model to BTL landlords, based around yields. Currently, the annual rate of return is only 7.5% per annum compared to the traditional build to sell model that generates 17.5% annually on average. What this means is that current Build to Rent developments tend to be focused on those able to pay high rents - largely young professionals in our big cities.

This approach risks under-serving what is often called the mid-market - those who are "just about managing", and live outside of our biggest cities where rents are (relatively) modest. They tend to be young families on median incomes and have little prospect of home ownership in the short to medium term, but are seeing an increasing proportion of their incomes eaten up by rents. These are the very people the Government wants to help.

Reform of the Buy to Let market needs to go hand in hand with a bigger strategy for Build to Rent so that secure, stable, good quality homes are available to those who need stable, comfortable, affordable homes. ResPublica's answer to this challenge is a National Housing Fund that would unleash the potential of housing associations and SME developers to build up to 75,000 new homes a year for mid-market rent. This would sit alongside private sector Build to Rent developments. And it would ensure that the efforts of ministers to squeeze the more amateurish end of the landlord spectrum out of the market and deliver new homes for rent could meet the needs of all renters.

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