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Tom Entwistle considers the current state of the UK housing market and how it could be affected by Labour’s policies.
If you were to try to list every problem with society today – not just from Britain, these problems exist right across the Western world - along with recovering from Covid, we might include slow growth, low productivity, climate change, poor health and obesity, financial instability, economic inequality, and falling fertility rates.
These issues are all related in one way or another, but one thing that makes all of them worse is expensive and scarce housing. There are too few homes being built that people can easily afford and where people want to live. America, Canada, Australia and New Zealand are all suffering the same problems, it’s not just a UK phenomenon, though in some ways the UK has it worse.
In her first speech this week as chancellor, Rachel Reeves promised to "get Britain building again". She committed to bringing back compulsory local authority house building targets, and an overhaul of the planning process.
The new government has without any doubt a “mountain to climb”, given the state of the UK housing market, with sky high rents, a whole generation unable to afford housing, in a market which, according to a recent Resolution Foundation (RF) study, provides an inferior product at a high price:
“UK households are getting an inferior product in terms of both quantity and quality. Compared to our general price levels, the UK has the highest quality-adjusted price of housing of any developed economy. If that’s not a housing crisis demanding a response…” the report concludes, “… it is hard to know what is.”
The Resolution Foundation’s report published in March, its first “Housing Outlook report”, looked into the state of UK housing compared to other developed countries. The picture it paints is not a pretty one.
To gain a better understanding of housing costs across the nations, RF worked on “imputed rent”, that’s an adjustment of costs taking into account the 36% of UK homes that are owned outright, with no additional costs except maintenance, and also the many subsidised homes in social housing.
RF finds that if all UK households were paying rent for housing, it would absorb a higher share of total spending compared to any other OECD country. Households would on average have to devote 22% of their income to housing, far higher than the OECD average of 17%, making the UK the highest housing cost location apart from Finland.
Credit: The Resolution Foundation
What’s more, UK residents enjoy less floor space, their housing is considerably more expensive and also of lower quality, compared to other OECD countries – nearly 40% of UK housing was built before 1946, most of it with little or no insulation. This compares with around 21% in Italy and one in nine 11% in Spain.
Being older and less spacious, with little or no insulation, means that a large bulk of (particularly rented) UK housing stock is less energy-efficient, driving up occupation costs. According to RF it’s an inferior product in terms of both quantity and quality.
Experts argue that high costs and poor quality coupled with housing shortages (shortages are not confined to the UK, they occur across the West) don’t just prevent many people from ever affording their own home, they lead to more inequality, they have a negative impact on the environment, they result in low productivity growth, obesity, and even falling fertility rates.
The UK is facing a range of housing issues which the new government has to tackle. The question for landlords is, how will Labour’s policy changes affect them?
Housing Shortage - There is a substantial shortage of housing, particularly affordable homes. This shortage drives up property prices and rental costs, making it difficult for many people to find suitable and affordable housing. Labour plans to turbo-boost house building.
Affordability - House prices and rents have soured, they have increased significantly, outpacing wage growth. This makes it challenging for first-time buyers to enter the property market and for renters to afford decent accommodation without spending a disproportionate amount of their income on housing. Will Labour resort to rent controls?
Quality of Housing - Many existing homes, particularly in the private rental sector, are in poor condition. Issues such as dampness, lack of insulation and inadequate heating, and general disrepair, are common. Some of these issues are affecting the health and well-being of residents. Regulations requiring improvements will mean more cost for landlords.
Homelessness has been on the rise. An accommodation shortage in the private rented sector, which drives up rents, means that many individuals and families are facing rent arrears and eviction. Once that occurs it becomes almost impossible for them to secure permanent housing. This includes both rough sleepers and those in temporary or emergency accommodation. Many local authorities are overburdened with homeless families.
Planning and Development - These are massive challenges to any new government; they are issues which largely defeated the Tories. They relate to an ultra-bureaucratic and convoluted planning system which takes forever to get things done. Land availability for new housing developments is restricted by green belt controls. The current stringent regulations, local opposition (nimbyism), and delays in the planning process hinder the volume or the construction of new homes. Will Labour overcome these issues without upsetting too many people?
Regional Disparities - There are significant regional differences in housing markets across the UK. London and the South East and other affluent regions are experiencing high demand coupled with high prices, while other regions may be facing serious issues of decline. In some there is a housing surplus and low demand, leading to neglected and deteriorating housing stock. Can Labour solve these disparities when they will be cash-strapped for new investment?
Brexit and COVID: have had a negative impact. The housing market and construction have suffered from labour shortages, supply chain disruptions, changing housing preferences, with an increase in demand for larger homes outside urban centres. Will Labour policies lead to more economic growth needed to overcome these set-backs?
Housing for vulnerable populations: There is a lack of housing at the right prices for vulnerable populations, including the elderly, disabled, and low-income families and immigrants. This shortage affects their ability to live independently and with dignity. Are there the resources available to tackle these issues?
Addressing all of these issues requires coordinated efforts from the government, the private sector, and community organisations. Can the Labour government provide the incentives needed for all concerned to create a sustainable and inclusive housing market.
Reeves said in her speech that “…the government would make the "tough" and "hard choices" to fix the economy, adding that the UK had lagged behind other developed nations for years.” So, in housing they have certainly got their work cut out.
In her speech Reeves also confirmed her commitment to abolishing Section 21 while committing the government to building 1.5 million homes in England over the next five years.
"The question is not whether we want growth,” she said, “but how strong is our resolve? How prepared are we to make the hard choices and face down the vested interests?"
Here actions and policy changes will have a far-reaching impact on private sector landlords, with perhaps more and tougher regulatory controls to come.
The housing issues facing Labour are daunting to say the least, and their response, which we have yet to see, could have several significant impacts on private sector landlords, many of whom rent properties to tenants funded by housing benefits.
The reliance on housing benefits offers a relatively stable income for those landlords in this sector, but future changes to housing benefit policies or delays in payments can affect cash flow and income stability for landlords. Will Labour increase HB payments?
Or will they impose rent caps and benefit cuts. Changes to housing benefit policies, such as the implementation of the Local Housing Allowance (LHA) caps, have limited the amount of rent that can be covered by housing benefits. This has made it harder for landlords to charge market rents and in many cases has reduced their rental income at a time when their costs are increasing. This is especially the case in areas where market rents exceed the LHA cap. And rent control generally is a concern for landlords.
Given the cost-of-living increases and inflation, landlords will face increased pressure to maintain their properties in good condition, while at the same time tighter standards and regulations will require landlords to spend more. Environmental issues and energy efficiency are likely to be a Labour priority. Failure to meet these standards can result in penalties or loss of the ability to rent to housing benefit recipients.
High demand for affordable housing has benefited landlords in those locations where there is a shortage. Those with suitable properties for private renters and housing benefit tenants, can be assured of high occupancy rates. It is unlikely that anything the government can do will change this high demand for rental housing in the short-term.
The regulatory environment for private landlords has become more stringent under the Tories and there’s unlikely to be a let-up in that regard under Labour. With increasing requirements for higher property standards, including insulation and environmental standards, tenant rights, and safety regulations, compliance will inevitably incur higher costs, administrative effort, and an impact on profitability.
How the market dynamics pan out under Labour’s changes will have their impact on landlords’ investment decisions and in turn will determine whether the rental market improves for both landlords and tenants, or it declines further – that we have yet to discover.
Landlords will only invest and stay committed to the private rented sector if they have a commercial imperative; if the rewards outweigh the punishment! Some will inevitably be deterred by the complexities and uncertainties associated with renting in general, and renting to housing benefit tenants in particular.
Labour must be aware of this dynamic: how it will affect the supply of private rental properties in the future, how rental housing shortages and investment strategies within the private rental sector will be affected by what they do next!
LISTEN: Catch up with Paul Shamplina, Eddie Hooker and Sean Hooker as they give their views on how a Labour government will affect landlords.
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