What is the booming private rented sector doing to housing costs?

Daniel Bentley, 14 May 2015

In the debate about private rents and whether we should re-introduce some form of regulation there is a great deal of anxiety about the impact that such a regime would have on landlords. The starting point tends to be: we wouldn’t want to scare off all the people who are making large and much-needed investments in housing. Indeed, when I considered this for Civitas, I was keen to develop a proposal that would not seriously undermine investment in private rented housing (you can read how, and why, in the paper itself here).

But what if we did cause landlords to disinvest? Wouldn’t prices drop, allowing more first-time buyers to get their hands on houses, and reducing the demand for private renting in turn? The subject came up at a Future of London seminar this morning where at least one in the room, and I suspect a few others, were keen on a return to the kind of rent controls that might see landlords take their investments elsewhere. John Bibby of Shelter pointed out that the reality of that might not be so enticing: in truth, few of those who would lose their homes if their landlords sold up would be in a position to buy a home straight away. Homelessness would rise and with a drop in prices housebuilding would dry up, worsening the shortage that is at the root of the problem in housing.

So the dangers of widespread disinvestment by landlords requires a cautious approach. But at the same time the growth of the private rented sector is at least in part to blame for the soaring housing costs we have witnessed over the past couple of decades. Policymakers have been – and continue to be – keen to encourage landlord investment, even though what it amounts to is usually a transfer of stock from one tenure to another, not real support for housing supply: most (not all, admittedly) of the investments are in existing housing, not new developments. And the amount of additional demand that has been created has been enormous. Buy-to-let mortgages were only introduced in 1996, but by 1999 there were 73,200 in place, worth £5.4 billion. By 2011, there were 1.39 million buy-to-let mortgages with a combined value of £159 billion. Buy-to-let accounted for about 13 per cent of total mortgage lending in 2013. But these figures only represent that private rented accommodation that is mortgaged – about two-thirds isn’t. (The sources for all of these figures can be found in my report.)

There hasn’t been a great deal of analysis of the impact on house prices of this demand – a demand that barely existed before the mid-1990s – but it can only be pulling one way. One graph that caught my eye recently, however, was on Brian Green’s excellent Brickonomics blog in an unrelated discussion about land values (you can read the post from which it comes here):

What this graph shows is the relationship between house prices and average earnings over the past 80 years. What is striking is that, while we know that nominal house prices have been rising more and more quickly since the early 1970s (as council house building has been wound down, incidentally), the point at which they ceased to correlate, broadly, with what people earn appears to have come much later, in the late 1990s. Precisely when the buy-to-let boom took off.