Whilst the UK Government have presented the nation with the idea of building more affordable homes in the social sector and promises of further regulation, licensing and reform of the private rented sector, there is still a case that lower rental prices are vital for economic recovery.
Pete Jefferys, part of the policy team at Shelter stated that lower PRS rent is vital for the UK’s economic recovery, if average PRS rents in the UK had risen in line with the rate of inflation since the year 2000, rather than well above, then tenants would have an extra £8 Billion (GBP) per year of disposable income.
Increasing rents for private rental sector tenants are beginning to become a sensitive political issue, especially in areas of high demand including London and the South East.
Private sector tenants are trapped between the expense of renting and unobtainable or unaffordable mortgages, with banks and mortgage lenders tightening lending criteria and demanding larger deposits for property purchases than they were prior to the financial crisis.
While this trap is frustrating for those who want to buy and devastating for low-income families with few other options, it may also be having an impact on the economic recovery of the UK.
Tenants renting property in the private rental sector are increasingly paying more in housing costs than those buying a property with a mortgage.
For some low-income tenant renters, the proportion of their wage going towards rent can be over 70%, especially in London.
The homeless charity, Shelter say they have collected evidence that increasing housing costs and financial uncertainties mean that tenants are attempting to reduce spending on many consumer goods and services, and due to falling household incomes, increasing numbers of tenants are being forced to use high cost credit to make up any rental shortfall, incurring high repayment charges and eating up even more disposable income.
The cumulative gap between rental costs and wages was growing in London before the 2007/8 financial crisis but now in 2012 it has grown even wider.
There are 8.5 Million tenants renting property in the UK, in London tenants pay on average, between 42 – 46% of their income on rent and economists say that there is a strong case that a lot of potential consumer spending is being lost and that the UK faces a demand crisis because there isn’t enough being spent on British products in shops to get people back into work.
Many landlords rent out just one or two properties and are using the rental income to pay off mortgages and earn a small yield. The result is that the amount of money being paid in rent is financing mortgage debt and not being re-circulated into the country’s economy. If banks were re-lending this money, again it might not be a problem. But, as we’re constantly hearing – bank lending has dropped massively since 2008.
Even if all rent went straight into the pockets of landlords there would still be a case that this is reducing spending in the economy. Higher earners spend proportionately less of their income compared to lower earners and on average landlords have higher incomes.
If average PRS rents in the UK had risen in line with the rate of inflation since the start of the new millennia rather than well above it, renters would have more than *£2,000 (GBP) extra per household per year
That would have meant far more going directly into the pockets of those on a lower income to be spent within the UK economy than the proposed VAT cut (offered by the Labour opposition and would cost the Treasury £12 Billion (GBP) per year).
High price rents in the PRS increase the housing benefit bill, which currently costs the government more than £20 Billion (GBP) per year, having doubled over the last decade.
The balance of UK Government spending on housing has shifted away from house building to covering housing benefits.
If 8% of private rental sector tenants moved to more affordable social homes, the UK Government would save up to £200 Million (GBP) per year.
Building more affordable council houses has the advantage of reducing pressure on the private rented sector and would increase spending power dramatically for those families who are in social rented properties.
A recent Shelter report stated the case for reform of the UK private rental sector proposing five year, inflation linked tenancies with two month break clauses for tenants.
The benefits of the Shelter proposition include stability for tenant families, more disposable income over the long term and are even supposed to be beneficial for many landlords’ business models.
Building more affordable social homes and reform of the private rented sector would help millions of tenants, currently struggling with the third highest housing costs in Europe, it would also put enough cash back into people’s pockets to sustain an increase in consumer demand that is not reliant on personal debt nor expensive tax cuts.
*3.62 million tenant households in 2010/11 paid on average £95 rent per week, if the median of £78 per week average rent from 2000/01 had risen with CPI inflation, rather than the actual 2010/11 median figure of £137 per week. Across the UK this equates to £7.9 Billion (GBP) extra rent paid per year, so on average a renting family would have £42 per week extra disposable income, or £2,184 (GBP) per year.
(*Figures from the English Housing Survey and Office for National Statistics).
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