Buy-to-let enthusiasm can drive new supply if we demolish housing barriers
It was at the time of another landmark Budget – Nigel Lawson’s in 1988 – that the UK’s rental market as we know it first began to emerge. The Housing Act’s deregulation measures of the same year, notably liberalising rents, set the scene for rapid growth in the private rented sector.
This was fuelled by the introduction of cheap buy-to-let mortgage deals in the late 1990s. In the capital, the size of the sector has more than doubled since that period, and it now houses 2m Londoners. This month’s Budget arguably sought to slow that growth with tighter tax relief for landlords, following the Bank of England’s warning that mounting landlord debt posed a risk to the country’s financial stability.
The timing is interesting given widespread predictions that new pension freedoms for over-55s could further fuel the buy-to-let market. In April, Savills forecast that around £1.2bn every year could be freed up from defined contribution pensions and find its way into the housing market – although this is a tiny sum relative to market activity.
While there is no doubt that buy-to-let has supported many new build housing schemes, around two thirds of its growth has come from the secondary market. The mayor and governments have explored how the rental market could contribute more to net new supply, rather than cannibalising existing stock, with a purpose-built-for-rent offer emerging in London, supported by planning measures and public land disposals. This is essential for a city seeking to double housing supply.
It’s very early days, but the latest Budget proposals could lead to a more creative approach to harnessing the money that’s been flowing into buy-to-let. Recent analysis shows that three-quarters of landlords are investors rather than “accidental” landlords. So why not invest through a vehicle – such as a Real Estate Investment Trust (REIT) or a similar fund – rather than take on the hassle of being a landlord?
There’s a compelling case to support it. It would offer flexibility, liquidity, and diversify risk away from the price of a specific home. It would also address the personal debt concerns raised by the Bank of England. In the long term, these vehicles could support the increased supply of homes, in contrast to the current fears that landlord activity may be inflating prices. Finally, it would help to address concerns about management standards in the sector, with the professional management advocated by the London Rental Standard.
Unfortunately, of course, such vehicles are not easy to get off the ground. Since REITs were introduced to the UK, almost all have been commercial rather than residential-led and, while pension funds are investing more in build-for-rent, there are relatively few retail investment opportunities. Perhaps there are insurmountable cultural barriers, but REITs’ potential seems particularly relevant for individuals looking to exercise new pension freedoms, given that existing defined contribution pensions average £25,000.
There is also an irony as REITs benefit from significant tax relief. These tax advantages were boosted recently with the introduction of stamp duty relief, extended this year to investment into shared ownership. This potentially enables an even more exciting development: a massive expansion in part-buy, part-rent, helping Londoners fulfil their aspiration to own despite living in a high value city.
So far, efforts to boost shared ownership have enabled 50,000 Londoners to buy, with typical deposits of just £15,000. A raft of recent changes to widen eligibility and mobility will expand it further. Recent innovations include a ten-year deal with Pocket, which builds well-designed compact homes at lower prices, and housing association Gentoo’s “Genie” product, which converts rent into equity. More reforms to support REITs or similar vehicles could help further.
We’re doing as much as we can to support supply-side measures, freeing up land owned by the GLA, offering cheap debt to developers using the London Housing Bank, and through the mayor’s landmark Housing Zones scheme, which removes obstacles to development and invests in essential infrastructure in key areas. Today, the mayor announced that we have reached a targeted 50,000 new homes, with three new zones unveiled in the boroughs of Westminster, Brent and Sutton.
But we need more innovation, in both the public and private sector, to get housebuilding up to the rate required. It is also critical to London’s success that we boost supply in the mid-market, both to rent and buy. Through the support of developers, institutions and even retail investors, a massive expansion of this market has to form the backbone of London’s future housing supply.