by Kitson Keen, Head of New Rental, Home Group
We are all aware of the supply side shortages in housing. Analysis by Savills shows that population growth has outstripped the building of homes by 19% in the decade since 2001. The disparity is even worse in London where the rate of population growth has exceeded demand by almost 75%.
As housing costs have risen rapidly, outpacing wages, large numbers of people have found themselves priced out of buying or even renting a home.
Average house prices vs annual pay
Sources: House prices – Land Registry House Price Index (chart used mid-point of year). Annual pay – median pay of full time workers – Annual Survey of Hours and Earnings (ONS)
This problem is particularly acute for millennials – the generation born between 1980 and 2000 – and those on low or average incomes, who can’t get a foot on the property ladder or afford rising rents.
PwC predicts that by 2025 more than half of those under 40 will be living in properties owned by private landlords. The number of new homebuyers is set to fall over the next 10 years as the high cost of raising a deposit locks large sections of society out of buying a home. PwC anticipates that the shift toward private renting will continue, reaching just under 25% of all households in 2025, up from around 20% today.
There are also social and cultural drivers underpinning a move to renting, particularly among millennials. Research from Grainger plc and ADAM Urbanism in 2014 showed that millennials exhibit distinct behavioural and cultural differences to previous generations in terms of lifestyle, spending patterns and key life decisions.
According to the research, a variety of social changes are supporting the growth in the rental sector including more flexible working patterns, the sharing economy, later family formation and commuting preferences. These changes align closely with flexibility and the reduced responsibility that comes with renting versus owning a home.
As the ULI Build to Rent Guide, Edition 2, puts it:
“Simply, the millennial generation prefer not to settle down as early on in life as their parents did. Millennials prefer to take more holidays. They want the latest mobile phone or gadget. They change jobs more frequently. They marry and start families later in life... The social trends taking place among the UK’s millennial generation mean they are using the built environment differently, including housing. Importantly… while they still desire to own a home at some point, they are doing so later in life and are renting for longer.”
A gap in the housing market
Homeownership is increasingly out of reach, especially for millennials and low income workers. Private rent is also not an ideal solution for many - although rents have tracked much closer to inflation over the past 10 years, significant rent growth still occurs when supply is outstripped by demand.
So is there space for new and innovative housing products to shake up the traditional tenures of social renting, private renting, affordable home ownership products and open market sale? Products that better serve consumers and take into account the realities of the housing market? The answer, surely, is yes.
Here are two new ideas, emerging in different parts of the market, which aim to the tackle challenges presented by renting and home ownership.
The New Economics Foundation and Home Group are developing a refined Build to Rent model that addresses the changing needs of the consumer while also tackling affordability and rent inflation. Flexible Rent has been designed to balance the requirements of the institutional investment market with the changing affordability of housing over the medium to long term.
A standard Flexible Rent scheme will consist of a mixture of discounted market rent (intermediate housing) and open market rent homes. The initial amount of affordable housing will meet the planning authority requirement but proportions of each tenure would ‘flex’ over time, based on an overall defined rental income agreed as part of the Section 106. The initial amount of affordable housing could also be increased through subsidy.
This approach ensures that the overall rent of a scheme remains at an agreed affordability level over time, regardless of local rent growth, by linking the defined income to CPI or RPI. This is particularly relevant for regenerating areas or locations with demand and supply imbalances, as rent inflation can significantly outperform CPI or RPI.
This approach supports the delivery of fully tenure blind schemes and reacts to the market, linking rent growth to inflation, to provide subsidy as it is required. Providing greater certainty over income reduces risk for the investor and could unlock new capital for the development of additional homes.
Even if renting offers a long term housing solution by providing secure, stable, affordable accommodation, renters still do not benefit from any growth in the housing market that many from previous generations have relied upon as their primary investment. There is a need for products to address this.
Property ISAs are one such product. Bricklane.com is the first online Property ISA. It provides a new way for savers to keep up with house prices, and receive rental income, by investing their money in groups of expertly chosen properties. Investments can be included within the Government’s ISA scheme and risk is automatically diversified across a growing number of properties.
Bricklane.com allows anyone to benefit from investing in the housing market, regardless of their financial position. Historic returns in the market have been much greater than interest paid through cash savings accounts, so Bricklane.com could enable those who want to buy to save a deposit more quickly and those who want to wait to delay buying without falling behind. Those who will never buy can access the financial benefits of ownership.
Its model is open to everyone and the company aims to expand its reach to include social tenants through working with housing associations.
In providing a simple alternative to cash savings, property ISAs offer a valuable introduction to personal financial management, as well as educating potential future homebuyers on the housing market.