Sir Adrian Montague is wrong in recommending that we grow the private rented sector. This could lead to a huge hike in housing benefit bills for future governments and undermines current pensions policy
Today saw the publication of a report on the private rental sector by Sir Adrian Montague. Its central recommendation is to unleash institutional investment in ‘build-to-let’ properties – homes not designed for owning, but just for renting.
The report highlights the ‘real potential’ for investment in large-scale development of homes built specifically for private rent by professional organisations. Controversially, the measures proposed to do this include waiving affordable housing requirements on new developments of homes specifically for private rent – effectively prioritising renting as a tenure over ownership.
The overall vision seems to be: lots of new, high-quality, affordable rented homes owned by institutional investors, rather than ‘mom and pop’ landlords. What could be wrong with that?
In short, there’s a lot wrong with this vision. There’s a fundamental strategic choice for society here: do we want the rate of owner-occupation to go up or down?
In recent years, this question has become confused by the cost of home-ownership on household finances, irresponsible lending, and a vague idea that the UK should be more ‘continental’ where – misleadingly – it is touted that lots of people rent and have no problem with this.
But, looking at this from the perspective of the public finances, it is clear that as a society, we simply cannot afford to let the rate of owner-occupation drift lower.
Why? The most obvious reason is that the vast majority of pensioners who rent in retirement rely on Housing Benefit. The cost of pensioner Housing Benefit for the Exchequer is about to go down, thanks to the arrival of the baby-boomers into old age, over 80% of whom own their own home.
However, if ‘generation rent’ is far less successful at getting on the housing ladder – as many predict – the Exchequer will face an enormous Housing Benefit bill when they come to retire. A recent report from the Strategic Society Centre estimated if only around 60% of today’s young people become home-owners – an estimate that some consider very optimistic – then the cost of pensioner Housing Benefit will eventually rocket by £8bn per year, in today’s terms.
Building housing policy around the idea that people should rent for their whole lives is therefore incredibly short-sighted. Yet Montague’s report pushes us further in that direction.
Consider another important factor: pension saving. If you don’t expect to own your own home in retirement you really shouldn’t be saving into a pension, since to do so, you will very likely be disqualifying yourself from means-tested Housing Benefit in retirement.
According to government figures, the average value of Housing Benefit received by pensioners in 2009-10 was £69 per week. In order to get an income of £69 per week in retirement, someone would currently need a pension pot of around £50,000. Yet the current average value of defined-contribution pension pots among retirees is £25,000.
So by building policy around an assumption that we should make it easier for people to rent, the government is directly undermining pension policy. In less than two months, the government’s historic workplace pension reforms will come on-stream, with millions of workers automatically enrolled into a workplace pension for the first time.
From the outset, there have been concerns that these reforms may amount to ‘mis-selling’ for some workers, who will merely be disqualifying themselves from state support in retirement if they save for a pension.
Rates of owner-occupation are therefore critical to this policy. Put simply: if at some point government projections do suggest that the rate of owner-occupation for younger cohorts across their lifetime will drift below 50%, the auto-enrolment reforms will need to be scrapped.
In fact, there is something of an irony here. Some of the flag-wavers for growing the build-to-let sector and having people rent their whole lives are in fact from the pension industry. Yet in trying to nudge housing policy in this direction, they are directly undermining incentives to save in a pension – another piece of remarkably short-sighted thinking.
There is a housing crisis in the UK that is undermining vast swathes of social policy, and which arguably requires the government to take the kind of ‘special measures’ you would normally expect to see in a time of war. Sir Adrian Montague’s report will not help the government address this crisis.
James Lloyd is director of the Strategic Society Centre
