Four ways to fix the rental crisis

As rents hit a new record high, Robert Powell looks at what can be done to reform the saturated private rental market...

Finding a good value rental flat in Britain is now more to do with who you know rather than what you know.

Indeed, everything about my forthcoming change of address is rooted in the ‘who you know’ mantra. I’m moving into a flat initially rented by a friend’s cousin and passing my current room onto one of my colleague’s friends. Not an advert or letting agent in sight.

This is hardly surprising. After all, with almost nine applicants chasing every room in some parts of the country, most of us will know at least one person who’s after a tenancy.

But as demand continues to soar, rents carry on rising. Last week we reported on the latest figures from LSL Property Services that show the average rent in England and Wales has now reached a new record high of £696. This is further eating into the deposit savings of aspiring first-time buyers.

Rising demand and high levels of rent is also fuelling a bounce back in the buy-to-let mortgage sector. A bounce back that, as I wrote last month, is muscling out first-time buyers and blocking up the residential mortgage market even further.

So how can a leash be put on the rental market without pushing up rents and harming first-time buyers even further?

Here are a few suggestions...

Flatmate mortgages

Rents are reaching record highs because demand is outstripping supply. The simple way around this is to make more rental properties available. The difficulty is that a mass expansion of the buy-to-let property sector inevitably squeezes residential supplies, pushing prices up and hurting first-time buyers even further.

One way around this is to create what the renting website Easy Room Mate calls the ‘flatmate mortgage’. Flatmate mortgages would allow first-time buyers to borrow more to purchase a bigger property providing they rent out a room to a lodger. This would allow the first-time buyer to get onto the property ladder while also increasing the stock of rooms available to rent.

Granted, taking in a lodger may not be to everyone’s taste, but introducing a flatmate mortgage scheme is still a novel way to increase stocks of rental rooms without affecting first-time buyers.

Incentives for larger properties

A further way to improve the supply of rental property while avoiding a distortion in the low-end residential stock is to try and focus buy-to-let investment on larger properties less suited to first-time buyers. The key aim should be to dissuade established landlords from snapping up smaller, more profitable properties and removing them from the residential market.

This could be achieved through a combination of carrots and sticks. Mortgage or tax incentives for landlords who invest in larger, multiple occupancy houses could be offered – increasing the rental room supply further. And in addition, restrictions or levies could be enforced to discourage buy-to-let investors from cashing in on more-profitable smaller properties.

In essence, a leash needs to be put on those buy-to-let investors who are solely concerned with profit. Along with regulation of buy-to-let by the FSA, such initiatives would help stave off another bubble in the buy-to-let market and create a more stable sector.

As I wrote last month, such actions would not be wholly to the detriment of landlords. Profit driven buy-to-let borrowing for over-priced properties built solely for cash-hungry investors was at the forefront of the 2008 housing crash. I’m positive that sensible, established landlords would be happy to see an increase in stability and decrease in volatility that regulation would bring to the market.

Getting the residential market moving

If certain properties are to be moved away from buy-to-let investment, help for first-time buyers must be stepped up to compensate for the shrinking numbers of smaller rental homes. This will also reduce demand for rental rooms by giving more people a leg up onto the property ladder.

One way to achieve this is through the use of shared equity schemes recently outlined by the government and Council of Mortgage Lenders (CML).

These schemes allow buyers to purchase their first home with a smaller initial deposit which is added to by a zero interest loan provided by the government and builders. The CML scheme is slightly different as it uses the additional funds, provided by developers and builders, to underwrite high value mortgages. These schemes would enable first-time buyers to get hold of lower interest rates and allow banks to loosen up their lending criteria due to the increased level of base funding. As a result of this surge in demand, builders would step up development of first-buyer properties, adding to the overall housing stock.

But help is also needed for those who bought their first home at the peak of the market and are now stuck in negative equity, blocking up first-time buyer properties. The government should be putting pressure on lenders who offered high value mortgages back in the boom years to help their customer’s progress up the ladder, as Lloyd’s are doing with their second stepper mortgage port.

Indeed, with 40% of these homeowners admitting that they would be willing to become a landlord themselves if they can’t sell, this ‘second stepper’ bottleneck is causing an even greater distortion in the first-time buyer housing stock.

Read Four ways to fix the housing market for some more possible ways to correct our broken property sector.

Ensuring efficiency

A further way of maximising the supply of rental rooms in this country is to ensure that the current stock of available housing is used as efficiently as possible.

Depending on who you believe, there is anything between half a million and 800,000 properties lying empty in the UK. This figure seems perverse at a time when rental demand is booming and waiting lists for council houses are expanding.

Councils should be given the power to force owners of derelict and unoccupied properties to sell them off or rent them out. Moreover, as I wrote back in April, a tax on the value of land would also help stamp out speculative and purely investment-based property ownership. This would be especially effective at cracking down on the hundreds of deserted ‘investment properties’ owned by wealthy overseas businessmen in the most affluent parts of London.

Government initiatives such as the ‘rent a room scheme’ that allows homeowners to earn tax-free income by taking in a lodger should also be encouraged.

Indeed, as the British economy heals more generally, rising costs begin to subdue and the mortgage and housing markets recover, the rental sector will also begin to calm. Yet a certain discrepancy still exists between the lucrative investment opportunities buy-to-let offers those with enough cash, and the needs of the squeezed population of renters. If these two factors can somehow be reconciled, it will be a positive step for all parties involved.

What do you think?

What can be done to fix the rental sector?

Have your say in the comment box below.

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