The Great Housing Gamble

Not long ago, the global economy was on the verge of collapse due to a housing boom. Are the recommendations of the Montague Review about to spark another one?

Renting a home in a country obsessed with home ownership has often been viewed as the domain of students and young professionals – a temporary home for those looking to move on to bigger and better things, rather than a place to settle down.

But all of that is changing. Many more people now live in private rented homes for an extended period of time, albeit not always by choice, with the “squeezed middle” unable to qualify for social housing or get on the property ladder. There are 3.6 million households in private rented housing, up from around two million in the early 1980s.

One-third are families with dependent children, and 20% have lived at their current address for more than five years.

Nonetheless, despite the rising demand for housing, developers rarely construct properties specifically for rent. In a sector dominated by private individuals – many own only one property and only 1% own more than ten – there has been a severe lack of investment.

“We would support the view that there is a market failure,” said Mark Allnutt, development director for social landlord Thames Valley Housing (TVH).

“The current delivery system is completely reliant on the primary need of the stock providers – developers and home builders – to return profit to their shareholders.” House builders are sitting on thousands of plots with planning permission to build homes, but there is no pressure to turn the plot into a home because the planning consent has a generous time limit. Banks will only lend development funds if there have been off-plan sales.

“Off-plan sales are taken up by investors, often disguised as buy-to-let investors, who are just as likely to sell if a margin is available at completion.” Off-plan investors, in either case, are mostly wealthy foreign investors who have no long-term interest in increasing access to the UK housing market.”

In its determination to expand the build-to-let market, the government tasked Sir Adrian Montague, chairman of the 3i investment group, with investigating why institutional investors are not putting money into the UK private rental sector.

His report emphasises the “real potential” for large-scale development of homes designed specifically for private rent.

“We are confident that the rented sector provides potential investment opportunities of interest to institutional investors,” Sir Adrian says. “There has been some activity in the sector, but real momentum is hampered by constraints affecting stock supply caused by the planning framework’s treatment of rented housing schemes, as well as the need to instil greater confidence among investors in the availability of good projects with acceptable, secure returns.”

According to the report, a combination of recent tax changes and broader market conditions have cleared the way for this sector to grow, and it makes a number of recommendations to shorten the timeframe for building private rented homes.

Councils are using “flexibilities” in the planning system, such as waiving affordable housing requirements on new developments specifically for private rent and reviewing stalled sites to see if some of the new homes planned could be made available to rent rather than sell.

It also suggests that a taskforce be established to encourage and support private-sector build-to-let investment, as well as to develop voluntary standards for future landlords; that the government provide targeted incentives to encourage the development of build-to-let business models, which could include sharing development risk in the short term to get building started; releasing redundant public sector land and buildings for build-to-let development; and the Go Local campaign.

According to Ian Fletcher, director of policy at the British Property Federation, who advised the review as part of an expert industry panel, the recommendations could “unleash unprecedented investment in house building from pension funds, insurance companies, and REITs [Real Estate Investment Trusts].”

“If we are to make progress in housing the nation and boost growth, we must look at other ways of getting homes built,” said CEO Liz Peace.

“Encouraging institutions to build homes for rent has long been regarded as the Holy Grail in enabling a long-term private rented sector that is designed and built-tolet and offers renters something unique in the marketplace.”

“The Montague Review’s recommendations will assist in addressing the barriers cited by the institutions and will provide an inclusive model in which housing associations, home builders, property managers, and construction firms can all participate.”

“Allowing reduced planning obligations for private rented schemes is a radical step and not without risks,” said Gavin Smart, director of policy and practise at the Chartered Institute of Housing. “But we need to consider radical approaches at a time when new house building is at record lows.” Families across the country are struggling to find affordable housing. If we are to address this country’s housing crisis, we must consider new approaches.”

While major house builders such as Taylor Wimpey, Barratt and Persimmon will undoubtedly be eager to see the Montague Review’s recommendations implemented, not everyone is convinced that releasing developers from the obligation to provide affordable housing is the way forward.

This proposal has sparked widespread concern in London, where many low-income workers are already priced out of the private sale and rental markets. It has been suggested that it could jeopardise the mayor’s affordable housing programme, as well as punish people in low- to medium-wage jobs or vulnerable families, while increasing the housing benefit bill.

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“Any strategy to increase the number of new rental homes should not come at the expense of new affordable housing,” said Councillor Mike Jones, chairman of the Local Government Association’s environment and housing board.

“Many of the proposals in this report are sensible, especially speeding up the release of public land,” Keith Exford, chief executive of Affinity Sutton and chair of the G15, which represents London’s largest housing associations, added. “However, we fail to see the case for releasing developers from obligations to provide affordable housing in London when house prices and rents continue to rise.”

“A shift away from affordable housing and toward much higher market rents will force more people to seek assistance through the benefits system, resulting in a massive increase in Treasury costs.” In a market that is severely constrained by a lack of supply, affordable housing provides far better value to both the Exchequer and tenants.”

Concerns have also been raised that the returns on offer to potential investors are insufficient.

“Any institutional investment will look for a reasonable rate of return to satisfy the demands for a return for the pension or insurance fund, whose investors are the general public,” said Ian Potter, managing director of the Association of Residential Letting Agents.

According to a recent report by Pricewaterhouse Coopers, buy-to-let landlords can expect a higher return on other investments until 2025, which should be a concern for institutions looking for effective investment vehicles.”

Last Updated on December 28, 2021

Indra-Gupta

Author: Indra Gupta

Indra is an in-house writer with a love of Newcastle United and all things sustainable.

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