After decades of neglect, today housing sits at the top of the political agenda. On the left and on the right, there is a strong sense that today’s young people in particular, and our country more generally, are being short-changed when it comes to housing. This is an account that has been confirmed by previous work for the Intergenerational Commission: we know that millennials today are spending more of their income on housing than previous generations did at the same age, but critically get less for their money when it comes to security and quality of life.
Turning this around so that young people can once again achieve the housing outcomes we all want is not an easy task. In this, the 19th report for the Intergenerational Commission and the latest in the series of policy options papers published in advance of the Commisison’s final report, we consider a range of potential approaches.
In the short term, dealing with the intergenerational housing challenge requires reform of the private rented sector (PRS) where so many young people live today, and in some cases are likely to reside for the rest of their lives. In the medium term, it means taking action to rebalance housing demand rather than simply stoking it, levelling the playing field between old and young rather than pushing up prices further. And over the longer term, it means accepting it will be a long haul to increase supply, and that both the private and public sector need to build more homes.
With home ownership often out of reach, and options in the social rented sector highly constrained, it is no surprise that four-in-ten millennials rent privately at the age of 30. While an acceptable and indeed often preferred tenure when footloose and fancy free, the limited security the PRS provides in England and Wales makes it far less fit for purpose as families begin to age. With the number of households with children renting privately tripling in recent years, and up to 16 per cent of millennials set to rent in the PRS from cradle to grave, it is time for warm words to be converted into serious action on tenancy reform.
The experience of other countries is instructive – indeed, we need look no further afield than Scotland to see how things can be done differently. There, as in Germany, the Netherlands, Sweden and Switzerland, indeterminate leases are the norm. These aim to balance the needs of tenants to create a stable home with the rights of landlords to utilise their property. Tenants can be asked to leave if they breach basic conditions such as treating the property well, and in a sensible set of scenarios such as when a landlord wishes to sell or reoccupy the home, but cannot simply see their tenancy ended at short notice without good cause.
Opposition to the introduction of indeterminate tenancies would likely be intense, but in our view could be overplayed. Fewer than one-in-ten tenancies in England today are ended at the landlord’s request, with more than 60 per cent of these occurring because the owner wishes to sell or use the property themselves, exactly the circumstances which any sensible tenancy law allows. While there may be hard cases, indeterminate tenancies would offer private renters unable to graduate from the tenure the sense of security we all wish to associate with the place we call our home.
Improved security of tenure needs to go hand in hand with other changes if it is truly to deliver for all generations. Critically, renters can only feel secure if they have some protection against sharp rental spikes which may occur if the local market experiences a rapid increase in demand or – more disturbingly – when a landlord uses a rapid rent increase to ease a tenant out. Light-touch rent stabilisation, which allows landlords to negotiate a market rent at the beginning of a tenancy but increase it no faster than CPI for the following three years, could achieve this end.
Changes to tenancy law and rent setting policy would need to be effectively communicated to tenants and landlords alike for the full effect to be felt. This could prove something of a challenge in England however where, unlike Scotland and Wales, there is no comprehensive record of who owns rental properties. Simply making it a requirement that landlords register with their local authority could easily solve this problem (and give councils greater leverage in their efforts to tackle rogue landlords too).
Reformed tenancies should sit alongside improved processes for resolving housing disputes such as when landlords legitimately request possession or tenants want to challenge rent increases that fall foul of new rules. In such cases, a speedy, cheap and effective arbitration mechanism is key if the interests of all are to be fairly served. With the county court system that currently presides over the majority of housing disputes displaying few of these characteristics, and the government rightly consulting on a better approach, a housing tribunal is an essential part of the intergenerational offer when it comes to the PRS.
While rent stabilisation would protect those living in the PRS from short, sharp rental shocks, it would do little to improve affordability for those low-to-middle income families who spend a large part of their incomes on rents every week.
In the short term, housing benefit (HB) – via the local housing allowance system or, increasingly, the housing element of Universal Credit – should be taking the strain. Today’s young people are doubly disadvantaged however. As well as being subject to more stringent HB rules than pensioners face, the combination of across the board cuts and a number of age-specific restrictions has reduced the value of HB for millennials relative to those who came before them. For example, on average HB covers just 55 per cent of the housing costs of non-working, private renting millennial families at age 25; the equivalent figure for generation X families at the same age was 77 per cent.
Ultimately, delivering on the purpose of HB requires it to be relinked to the level of rents. In the meantime however, the logic underpinning age-related restrictions requires some scrutiny. In particular, we question whether it is appropriate to expect low income, single private renters with no children to share up to the age of 35 given that this is not ‘normal’ behaviour for their better-off peers at that age. Consequently, we propose reducing the point at which young people can only claim the shared accommodation rate (SAR) to under-30 as opposed to the current rule of under-35.
Despite the barriers that many face, as many as 65 per cent of young people still aspire to buy their own home. While improvements in the PRS might damp down this enthusiasm over time, home ownership is likely to continue to be the preferred tenure – not least because it allows families to build up an asset, increase security and reduce their housing costs as they age. But, in contrast to older generations who lived through an era of credit liberalisation, today’s young people have to contend with a tightening (albeit more macro-prudentially sound) lending regime. Combined with house price growth that has drastically outstripped incomes in recent years, this results in deposit requirements far larger than in the past.
For many, the dramatic fall in home ownership levels of young people is coterminous with the housing crisis. It is unsurprising, then, that policy makers have focused on supporting young people to purchase a home in recent years and, in particular, have aimed to help them overcome deposit barriers. A narrow focus on interventions which support demand, such as Help to Buy equity loans, ultimately risk being self-defeating however. As well as having significant deadweight costs (which indicates better targeting is in order), the evidence also suggests simplistic demand-side policies of this type stoke house prices too.
A better, more radical, approach would be to rebalance demand for housing in the interests of younger generations through better use of the tax system. We estimate that close to one-third (32 per cent) of the total housing stock is owned by someone who could be described as ‘over-housed’, either because they significantly under-occupy their home or because they own multiple properties (other than those they rent out). While it is entirely natural for individuals to want to consume more housing as their income grows – and many of those who are ‘over-housed’ end up in this category more as a result of happenstance than deliberate design – in our view there is a clear case for not tax advantaging consumption of these types and in some cases explicitly disadvantaging it, thereby improving the relative position of first time buyers.
Since April 2016, purchasers of additional properties (including those who buy to let) have been subject to an additional stamp duty surcharge designed to make it less attractive to buy a second or subsequent home. Increasing this surcharge for buyers who are resident overseas by an additional 3 percentage points would bring us into line with practice in Australia and Vancouver, and would moderate what in some places is a significant source of demand. Beyond this, we argue that the main way to change the relative bargaining power of first time buyers would be to cut stamp duty across the board, while maintaining the surcharge for UK-based buyers of second and additional homes at current levels.
While in isolation a stamp duty cut risks being ‘baked into’ house prices, this would have the welcome effect of reducing the ‘stickiness’ of the UK housing market by increasing transactions. In particular, this change would enable over-occupiers to downsize more easily – something they may also be keen to do if council tax were levied more efficiently as has been proposed in a previous policy options paper for the Intergenerational Commission. Moreover, we argue that council tax discounts on second and empty properties should be abolished, albeit with limited exceptions such as homes held up in probate or undergoing renovations.
Having made it less attractive to be ‘over-housed’ – but easier through stamp duty cuts to move to a new main residence – it also makes sense to review the tax treatment of those selling second and subsequent homes. Under current rules, capital gains on additional properties are taxed on sale but forgiven on death. Requiring capital gains tax (CGT) be paid on additional properties when bequeathed to anyone other than a spouse or civil partner would be a sensible step that would discourage owners holding on to additional homes until death. But there is also case for making it even more attractive to put additional homes on the market. Tripling the CGT allowance for those selling to a first time buyer for a time-limited period could have a large dynamic effect, bringing forward disposals that would have otherwise have happened in the years ahead.
While some regard building more homes to be the ‘be all and end all’ of housing policy, others have argued recently that a lack of supply has played no role in intergenerational housing inequalities. We think the truth sits somewhere in between. We note for example that 29 per cent of millennials still share a home either with their parents or others to whom they are not partnered at the age of 30, compared to just 16 per cent of baby boomers at the same age. And when we look cross-nationally at the ratio of population to housing stock, we see that the UK is not only a poor performer compared to other OECD countries but has actually recorded a fall in its ratio over the last 15 years.
Longer term, tackling housing affordability is likely to require a combination of tempering housing demand and building more homes. The government’s target of increasing (English) housing supply by 300,000 units a year is a worthy ambition, with studies suggesting that sustained over time, volumes such as this would have an effect on housing costs and prices. But declarations are one thing, delivery another: when we look at the data since 1946, we see there have only been six years in which 300,000 homes or more were built. If as a nation we wish to build at scale once again, it is clear that this cannot be achieved by ‘business as usual’.
So what does the industry say would enable it to up its game? Developers point to two key aspects of the housing market that constrain their efforts to build at greater volume.
To begin, planning is often regarded as grit in the system, holding back development and dulling ambitions. In fact, the evidence suggests that the many changes already made to planning rules in recent years have had a positive effect: while a decade ago 83 per cent of planning applications were successful, today that figure stands at 88 per cent. But hollowed out planning departments are clearly under pressure, which is why we suggest a central resource of expert planners be created to boost the capacity of ambitious local authorities keen to increase their housing stock.
Second, if we want many more new homes we need to find new land on which to build (or change the rules around density and space). Many accounts have documented the dysfunctionalities of the land market in the UK. We think it is time for radical action on this account. Community land auctions, with local authorities acting as brokers in land deals, should be explored further through a proper pilot scheme. But this most inventive of policies still requires a backstop to ensure enough land is brought forward. Given this, the compulsory purchase powers of local authorities should be reviewed.
Beyond these general reforms, it is also worth thinking about changes to ensure developers build more of the types of properties that have an important role to play in addressing the intergenerational housing challenge. The nascent Build to Rent (BTR) sector could be given an additional spur if institutional investors were exempted from the stamp duty surcharge for example. However, as a quid pro quo, we believe that BTR developments should have to deliver on a full quota of affordable homes (on-site or off-site). Relatedly, evidence suggests it is time to tighten up the viability rules and allow local authorities to claw back compensation if developers are shown to have negotiated down their affordable homes requirements in an unreasonable way
Even with significant planning and land reform it is questionable whether the market will ever deliver the number of homes to which the government aspires. If we look historically we can see that it is only when the state has taken a proactive role in building that figures close to 300,000 units a year have been achieved. As the Lewtin Review recently made clear, it is simply not in private developers’ interests to build at rates that would have an effect on price – something we should not be surprised about when their duty of care is owed to shareholders and not to the public good.
All of which points to a single, simple conclusion: if we want to build consistently at sufficient scale to produce a price effect the state has to build once again. The rise of council housing companies and indeed the expanding housing association sector shows there is no lack of appetite for this task. It is only with sufficient funds however that state building is likely to take off, which is why we suggest two key changes be considered. First, we propose that mayors be given more scope to borrow as part of city deals. Second, and more radically, we believe that once funding gaps for social care are plugged, the social care precept should be repurposed as a building precept. This would give local authorities the ability to raise up to £1.5 billion in revenue in 2020 which they can dedicate to kick-starting building in their area.
As the wider work of the Intergenerational Commission has shown, housing is the number one concerns that people raise when asked to ponder the living standards prospects of today’s young adults. The agenda for action we set out in this policy options report is comprehensive in scope and bold in its ambitions. The interventions we outline aim to improve the housing lot of young people in the here and now, but also address many of the underlying structural determinants of the predicaments so many of them face today.
As our analysis makes clear, if we fail to get to grips with all the manifold dimensions of housing policy we risk a generation of children growing up in insecurity, their parents spending progressively more of their incomes on housing, and a pensioner housing benefit bill more than double the size it is today and as much as £16 billion by 2060. There are legitimate interests to be balanced across the board – landlords versus tenants, multiple property owners versus first time buyers, land owners versus the state – but we think it is time to put those who have been ill-served by historic housing policy front and centre stage.