Tim Leunig writes… Housing priority Number 1: reversing the rise in the age of first-time buyers

Sir Adrian Montague’s report on housing, published earlier this week, calls for a larger private rented sector. This is a very bad idea because being a private renter is the least popular tenure choice in Britain. Only 2% of people wish to be private renters, compared with 82% who want to own, 14% who want to live in social housing, and 5% in other tenures (see here for details). I bet that Sir Adrian is not a private renter.

The private rented sector has its place, most notably for young people who have yet to settle down. But thanks to the rise of the buy-to-let landlord, Britain is not particularly short of private rental property. Far from being a nation of owner-occupiers, Britain’s level of owner-occupation is typical for a European country.

Montague suggests that the private rented sector could be encouraged by the public sector sharing the risks on stalled sites. This is a bad idea since it will encourage developers to stall sites, so that they can offload part of the risk onto local councils. We will get even fewer houses in the short-run, and no more in the long-run.

More controversially, he suggests that councils should waive the requirement that developers provide social housing if they build for rent rather than owner occupation. This is a truly bizarre idea: we would lose social houses that we desperately need, in order to gain more houses of a tenure people do not like. It is hard to imagine a less sensible or popular proposition.

Instead of trying to boost the private rented sector, we need to think about how to reverse the rise in the age of first-time buyers. In the 1930s, skilled manual workers were able to buy a house: we need this to be true again. This is popular with the people who would become owner-occupiers, and it is also good for us all.

People who are unable to buy by the age of 40 are unlikely to buy at all. This is because people over 40 cannot usually get 25-year mortgages, pushing up the monthly payments and making owner occupation even less affordable. The result is that they remain renters at retirement, and are very likely to be on housing benefit, at great cost to all of us. That is one reason why owner occupation makes sense for society as well as the individual.

We are short of housing in Britain, and getting house builders building again would also help generate economic recovery. Building 100,000 houses gets a third of million people into work, and raised GDP by about 1%. What we need are houses that are more affordable, above all for purchase.

* Tim Leunig is Chief Economist at CentreForum. He served as an advisor to the Barker Review on Land Use, and is a former Inside Housing columnist.

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  • Thank you!

  • Building 100,000 houses would have no effect on house prices whatsoever (or so marginal that it would fall below the noise of price fluctuations) but would be welcome nonetheless – as we’ve seen and should all know by now, our high house prices were caused by unsustainable demand in the form of cheap and easy credit followed by base rate slashing and incredible forbearance by banks against debtors that should have had their houses repossessed.

  • Lorna Dupré 26th Aug '12 - 2:38pm

    I’m not normally a CentreForUm groupie, but I absolutely 100 per cent totally agree with this piece. Next question – how to make it happen?

  • Anne Forgettable 26th Aug '12 - 3:10pm

    I think home-ownership is still fairly common, if not the majority then at least a significant minority, so I don’t think we’ve gone back to the 1930s state of affairs when only the super-rich could own their own homes – but we’re probably not far away from that. But we should really be aiming to increase home-ownership to the levels of the 60s and 70s, to make buying your first home as achievable as it was then.

  • Owning their own affordable home is the prefered housing choice for the majority of people.

    It is also important as the shrinking rate of home ownership is building up a family poverty and pensioner poverty timebomb, and increases inequality.

  • Peter Welch 26th Aug '12 - 3:40pm

    Good article, and I agree with the points you make. The Hills Report however says that while private-renting is an unpopular housing choice, dissatisfaction with current housing is – massively – highest for people in social housing (at least for people under the age of 65).

  • Nonconformistradical 26th Aug '12 - 4:01pm

    “Britain’s level of owner-occupation is typical for a European country.”

    I note the stats do not include figures for Germany – which has a much lower level of home owenership than the UK.


  • Excellent analysis as usual, Tim, but as @Lorna said I look forward to Part II – How to achieve a massive boost in homes built for owner-occupancy.

  • Richard Dean 26th Aug '12 - 6:11pm

    I would expect something a little more professional from someone who is described as a “Chief Economist”. It just isn’t so simple.

    Building 100,000 homes might once have created a third of a million jobs, but will it now? If firms are working at below capacity, the increased building work may increase the usage of labor that is already employed. While this too can be a good thing, it suggests the benefits of 100,000 homes may be less than claimed.

    Getting people to buy 100,000 new homes means that the home buyers’ debts increase, by the value of 100,000 new homes, and this reduces the consumption that those people would have made on other things. So, while there may be a boost to the economy during the building phase, there is an equivalent depression of the economy as those debts are paid off over time. Indeed, the depression might start as soon as the building program is announced, as more people slow down their present consumption in order to save for the down payment.

    Have these effects been factored in to the calculations, if any, that support this post? What other measures will be needed to support the building program – such as provision of low cost loans – and what are the costs of these extra measures?

  • Excellent post.

  • Speaking as a 20 something, I have absolutely zero interest in buying a house any time soon, for me and my family (if one starts to form). It seems such a reckless gamble with little savings, when there are no steady jobs with prospects I can count on to be there in 5-10 years time in affordable areas, not to mention the huge changes in public policy that could happen after 2015 in housing and schools.

    I just don’t see the benefits of not renting for people in similar economic circumstances, apart from the initial euphoria of owning something you can’t afford.

  • I note Sir Adrian’s report is immediately dismissed out of hand from prejudice and snobbery, instead of any question of looking at why private rental is not seen as aspirational enough and what leads to such apparent dissatisfaction with the properties. Getting caught up in sentiment without heed to the details will just lead my generation straight into another bubble.

  • Thanks for your comments. Let me reply to them:
    Lorna/Catherine – if the editors want a piece on how to increase housing numbers I will write one (or go to FT.com and google Besley/Leunig)
    CP is right: growing inequality is another reason why we need more houses.
    Peter is right that people in social housing dislike their provider, but they do like the idea of being social tenants. The numbers are in table 7.3 of Hills’ report.
    NCF: I don’t know why the Eurostat numbers omit Germany, which, as you say, is an outlier.
    Richard: Sorry, but I don’t know any economic model that would have the effects that you suggest! Few building firms hold surplus labour, so the 3.3 people/house is a reasonable estimate. This is only the construction sector – I didn’t even include the jobs manufacturing bricks, glass, etc, which are overwhelmingly domestic. If the mortgage is the same as the rent, there is no depression effect.
    Robson: I didn’t dismiss Sir Adrian’s report from prejudice or snobbery. I looked at the evidence! You are one of the 2% of people who want to be a private renter – which makes you unusual. I am not saying that you should be forced or bribed out of your preferred tenure. If you don’t have a steady job, then buying a house would not be sensible. But lots of people, particularly in the SE, have steady jobs, would love to buy, and cannot afford to. There is a public policy issue there that needs addressing.

  • Simon McGrath 26th Aug '12 - 7:29pm

    @Anne “I don’t think we’ve gone back to the 1930s state of affairs when only the super-rich could own their own homes ”
    The 1930s were a golden age of house building for middle class families – one of the things which helped get at least parts of the UK out of the Depression.

  • The fact that only 2% want to rent privately shows how brainwashed the population have become. There are benefits to buying instead of renting, such as not having to have the house inspected every few months and security of tenure but, at the moment, it is cheaper to rent than buy given that house prices are falling at 2.6% per annum according to Nationwide. The question is, why do 98% of the population want to do something that will make them financially worse off over the long term (accounting for how much less in mortgage payments and interest the buyer will have to pay of they delay purchase and rent)?

  • Richard Dean 26th Aug '12 - 11:53pm

    I wonder where these 100,000 homes will be built? Some place where there is high unemployment – unlikely, since that’s where people don’t have jobs and don’t want to move to. So is this initiative is aimed at benefitted the well-off places? You don’t usually bus a workforce 100 miles and back to do a day’s work. Which means that the builders will come from a workforce that is not doing too badly now anyway.

    And what kind of houses will they be? Cheap ones? No – there’s no profit in cheap ones, and if there was, first-time buyers wouldn’t be enabled to buy. So we are taking about using an existing working workforce in relatively rich places, maybe London?, to build middle or upper market housing for existing owners to move into so that new owners can buy the homes they vacate?

    But where will these existing owners get the extra money from? And given that there are many areas where houses are on the market and have been for some time with no buyers, does this whole deal make any sense at all? Not to me! And the work of manufacturing bricks, glass, etc may not make extra jobs at all, but be taken up in available employed capacity.

    The total stimulus effect is the net cost of the 100,000 homes. Maybe 5 to 10 billion? Ok, noticeable, but also enough to require a proper formal business justification as opposed to wishful dreaming. Especially if there is a half-way credible alternative in the Montague report (which could also do with some proper validation). Where will it come from, who will it really benefit, and where is the credible calculation that shows how and why it will be enough?

  • David Allen 27th Aug '12 - 1:06am

    “Only 2% of people wish to be private renters”

    Yes, but it depends what sort of question people think they are being asked. Looking up the details, of those who are actually renting privately, only 8% said that was what they would have preferred, while 72% would have preferred to own their own property. Well, quelle surprise! No doubt 99% would have expressed a preference for living in a mansion with a swimming pool and two Jags in the garage, if they had been offered the choice!

    Meanwhile, back in the real world, lots of people settle realistically for renting rather than trying to buy, for all sorts of practical reasons.

  • As other posters have pointed out, Germany is a lot more than an ‘outlier’ (a rather large one at that!); it is also an example of how a very different model can be both successful and popular.

    Much as I normally agree with and greatly respect Tim, I don’t think it’s good enough to build a policy based on current low levels of popularity of private rented housing in the UK. We should also be looking at *why* private renting is unpopular in the UK, why it is popular in (say) Germany and whether there are things we can learn to make it better here.

  • Brian Robinson 27th Aug '12 - 10:13am

    Several people have questioned, given the statistic that only 2% of people had said their preference was to rent privately, whether people should want to rent privately. Is it the result of brainwashing, as comments have suggested? Would it be better for people to rent rather than own property?

    My experience may shed some light on this debate. I rented privately. At the time I was working full-time as a teacher and had just moved to a new area. The rent I paid was about the same as the monthly repayment on a mortgage for a similar property – so when I had the chance, I bought a property. To me there was a straightforward comparison: rent for 25 years or take on a 25 year mortgage, where in the former I would have nothing at the end of it and in the latter I would own the property.

    That’s why it was my preferred option to buy. I could pay about the same each month, so I was no worse off (so no need to cut spending on other things, which is relevant to the present discussion). It wasn’t even debt in the sense of buying something extra by taking out a loan, such as getting an expensive new car when the old one would do: the repayments were a monthly cost I would have to pay anyway if I rented.

  • There’s a large percentage of the population that simply cannot afford to buy homes. The concept of what constitutes an affordable home should be linked to income rather than the relative value of property. You need to be putting money back in peoples pockets and the housing will follow naturally,. Building without a fundamental change in people’s incomes will simply create another bubble, which will burst.
    More social housing and fair rent agreements would deflate some of the housing bubble, but you’ve got to clobber the Conservative idea of rents being linked to house prices because a lot property is already out of reach for a lot of people. In other words you don’t need affordable homes, you need cheap ones.

  • I think this piece starts from entirely the wrong premise: that just because property ownership is the preferred form of occupancy that it has to be so in future. This means UK households tie up their capital in property rather than investing it elsewhere. It also creates a geographically immobile population which does not help the flexibility of our labour market.

    We need to work out a much clearer policy for making private renting more attractive for renters, with longer term leases and better lease conditions as well as enforcement of minimum standards and incentives for landlords to invest in things like energy efficiency.

    People want to own their own property because it means security and they feel they are certain of rising property values. But if we could remove or reduce the uncertainty in private renting, improve standards of properties available and if there is no certainty of rises in property values, the whole picture would change radically.

  • Simon McGrath 27th Aug '12 - 10:45am

    @RC “We need to work out a much clearer policy for making private renting more attractive for renters, with longer term leases and better lease conditions as well as enforcement of minimum standards and incentives for landlords to invest in things like energy efficiency.”

    All of which will reduce the supply of rental property and increase its price. is that what you want ?

  • People interested in the German Housing Market should read the excellent http://www.policyexchange.org.uk/publications/category/item/bigger-better-faster-more-why-some-countries-plan-better-than-others (Oliver is German). Renting doesn’t lead to poverty in Germany because rents are very low. That is because there is a huge amount of housing, so tenants rather than landlords would have the whip hand, and regulations on landlords would not push prices up to levels that become unaffordable. If we built several million more houses, partly in the South East, and had a planning system that released more land automatically if prices rise, then we would be better places to emulate the Germans. Germany does remain an outlier, however, with no other developed country following its model.

    I am not prejudiced in favour of any tenure, simply stating that when people overwhelming prefer A to B, and have done so for years, and when A can be provided as cheaper as B, it is odd for politicians to aim for B rather than A, at least without evidence that the preferences are changing. As I have said, private renting (and social renting) have important roles to play.

    On a couple of specifics:
    – One attraction of buying is that you pay for your house in your working lifetime, and then don’t have to pay when you are retired. That means you match your expenditure to your income, which makes intuitive sense. This underpins Brian’s comment.
    – Owner occupation does not tie up capital – my owning a house ties up my capital, but if I rented, my landlord would have tied up the same amount of capital.
    – The stimulus is approx £120k per house. We have relatively high unemployment among groups likely to work in construction, partly because of big falls in house building and other infrastructure projects. So the gross and net will be similar, with displacement likely to be of a similar order of magnitude to the multiplier effects.
    – The BSAS Q is Q644/CARD G2: “Leaving aside any plans you might have for the future, which of these, if
    any, is the type of housing you would most want to live in?” People are then asked:
    – If you had to choose just one of the things on this card, which one would you say is the main advantage of owning a home?
    – And if you had to choose just one of the things on this card, which one would you say is the main advantage of renting a home?
    (http://www.britsocat.com/pdf/BritSocAt/BSA2004_G087.pdf#search=“[TENPREF]”&toolbar=0&navpanes=0&zoom=125 – although I expect you have to register to get access)

  • Neil Bradbury 27th Aug '12 - 12:32pm

    I bought my house (well got a mortgage!) because there was not a good range of private rented housing in my area. Then when you want to move you find it hard to sell without making a loss, which means the volume of sales goes down and people don’t move for new job opportunities. If we want the levels of labour flexibility CentreForum keeps going on about, encouraging people to invest in things that make moving to take advantage of new jobs harder seems a strange way of going about it. My friend in Germany rents from a landlord who owns a block of high quality well maintained flats. The landlord has had the block in his families ownership for years and is not interested in selling them off when property values climb. My friend has security of tenure but at the same time knows he can move to another city if another job comes along. Obviously we want a mix of tenures but if we could encourage a more vibrant private rental market with more long term investors in the field that does not be a bad thing. I think the Montague report has merit and we shouldn’t always assume that the Daily Mail/Tory desire for increased home ownership is necessarially a good thing for the UK

  • Max Wilkinson 27th Aug '12 - 12:43pm

    Great blog and I agree wholeheartedly. Very few people want to be a private renter and there are some very good reasons why.

    Firstly, landlords are only in it for the money. Shock of all horrors. If your rented home is damp and they don’t want to fix it, you are unlikely to get any joy.

    Secondly, when lettings agents are charging £300 to carry out a credit check (which apparently just involves putting details into a computer system and calling a couple of old landlords), something has gone badly wrong. Why is this fee not regulated? It cost about £100 a few years ago, but now the price is three times that.

    Thirdly, in the south of England, it’ll cost you more than £400 per month to rent a room in a student-style shared house. Surely this is madness. If you want to own your own flat , forget it. You’ll have to save £25k for a deposit. If you want to rent your own flat because you’re sick of living in a shared house, it’ll cost you so much that you’ll have no money left to save for the future.

    I could go on, but you get the picture.

    There must be plenty of votes in decent homes for the young, but politicians of all colours, including some of our own, don’t seem interested. If you’re a greedy developer or a NIMBY, your voice gets heard. If you’re a struggling 20-something, nobody seems to care.

  • Charles Beaumont 27th Aug '12 - 2:01pm

    The question of the popularity of renting vs. owning surely needs a bit more examination. People like the idea of owning property, not least because they like the idea of making money very easily – which was the case for most property owners for the past few decades. There are going to be upsides and downsides of a rush for property ownership. Among the downsides are creating incentives for things that aren’t positive such as 125% mortgages and “self-certification”. So the fact that more people want to own than want to rent does not seem in itself to be a compelling argument. Having said that, the rest of the piece, including the economic case for expanding the housing stock, seems unarguable.

  • Neil – you have really helped clarify my thinking. Your comment made me realise that one reason that I like o/o is the more even distribution of wealth. In your German example, one person inherited lots of flats, and lots of tenants don’t own any property, and certainly don’t get to inherit it. The owner occupied equivalent is that no-one owns lots of property, and lots of people own one property. The latter seems a more appealing distribution of wealth to me.

    (Strictly speaking we could all own one property each and rent it out, while renting from someone else, but that doesn’t seem very likely)

  • Richard Dean 27th Aug '12 - 2:47pm

    Wealth does not reside solely in tangibles. Ability to move without too much fuss is an aspect of intangible personal wealth, and labour flexibility is arguably an aspect of intangible national wealth. Other intangibles include absence of worry about taxes, safety in neighbourhoods and at work, and lots more.

  • For the property market to be more bouyant requires a more readily available supply of mortgages, especially for first timers. If that were the case then selling and moving would take only slightly longer to execute than giving two months notice and re-locating… the time taken in property buying and selling are almost all down to slack estate agents, (more interested in getting a good commission) and slothful conveyancing solicitors, who in some cases are grossly confused about who their client is. Some real regulation of property professionals, both in the renting and selling sectors would go a long way, starting by making it illegal for a lender to own an agency. Most are owned by lenders so their priority is the financial product they want to sell to both lender and buyer, and then they try to appoint their own legal team to handle everything, when in simple terms there are three parties to most property transactions, so there should be be three lawyers. .(and they talk about politicians being corrupt!).
    Buy-to-let started life because returns on bank investments and pensions were so poor, whereas investment in property over any 10yr period(even a recession) almost always makes a profit.. and it doesn’t even have to be occupied. That is the key reason for there being lots of property standing empty, so to bring it back into use is not about making grants available to improve empty property, but charging council tax/or UBR on any building with a roof on it.

  • Helen Dudden 27th Aug '12 - 4:36pm

    I think the problems with the housing market has been one of boom and bust, there has at times been a very volatile market. Inflated prices, then the bottom falls out of the market. If we build for the private sector what will the prices be, at present the market is quite high on the rent al costs it can rely on Housing Benefit, I am concerned that we are not going about this subject properly, there will always be a need for Social Housing, as there is a need for first time buyers homes ,and also part buy.

    When buying a home there is the cost of maintaining the property, that is why we need a more balanced approach to supplying homes. A lot is being written about this problem, we need to start solving it now, I am working with a Housing Trust on the way forward for new homes,

    The younger end of the market is at present finding life very difficult to get a home of their own.

  • Richard Dean 28th Aug '12 - 1:07am

    It might be consistent with liberalism to aim for a situation in which people have a free choice of rent or buy. This might be implemented primarily by arranging that the costs and benefits of the two options are roughly the same. Is there a practical way of doing this?

  • Helen Dudden 28th Aug '12 - 9:13am

    Firstly we undertake a serious consideration of the problems we have, then we consider what can be done with some of the older Housing stock within the Social Housing Sector. I know for a fact some of them would be better under a pile of rubble, There is still the option at present of having a certain amoung of Social Housing, with the house building as such. But what sort of housing is needed? We need housing for the young, first time buyers are then on the ladder to owning a property. As I remarked, my concerns with a Private Landlord are the they at present do not have to comply with the Decent Homes Incentive, brought in to improve the Social Housing. Cost is there too, I repeat Housing Benefit is one thing I should like to see controlled more, it could then reduce the costs of rental, keeping them lower. We need good lending to those who wish to buy, of course they must fit the cirteria,that can only help in the long term. A more stable housing market, the situation of prices is a worry. If you could add further to air the subject promotes more interest and I happy to listen to others, we do need to improve the terrible waiting lists on Social Housing and get more first time buyers on the ladder.

  • LondonLiberal 28th Aug '12 - 11:45am

    Tim is of course quite right to say that we need lots more housing in Britain, or at least in the areas of Britain with a housing shortage. However, I think that his analysis is slightly flawed. He bases his article on the questions asked in a survey about preferred form of tenure. However, these are based on the situation as it is now, and not as it might be.

    What i mean by this is that, if tenancy rights were improved, if management of rented property was more professional, if the quality of the PRS (private rented sector) was higher and more reliable, and if house prices didn’t always rise by substantially more than inflation, i suspect that many more people would be happy to rent rather than buy than current surveys suggest.

    I’m sure that if you asked people if they would like to own they would say yes, just as if you asked Londoners if they would like to live in Hampstead/Kensington etc they would say ‘of course’. But the reality is that most Londoners can’t live there and never realistically would be able to. So you need a policy that deals with practicality of implementation. To bring house prices within the reach of people not yet on the housing ladder in London would require either a massive bursting of the city’s bubble – which isn’t likely to happen – or such a large increase in supply that we would have to knock down vast swathes of the city and rebild at much higher densities, which also isn’t going to happen.

    The Montague report, which isn’t perfect by any stretch, at least tries to deal with these realities, and proposes practical solutions to the situation many find themselves in.

  • LondonLiberal 28th Aug '12 - 12:04pm

    It’s also worth noting that the PRS may be best seen as a regional solution to a regional problem. Tim shows the level of home ownership in the country generally, which is in the high 60%s. However, in London it is only 52%, and in some London boroughs it is only 25%. Often in the same boroughs, over 20% of households are in the PRS. To get from 25% to 70% owner occupation would take decades, if it were even achievable, so PRS reform would at least help in the meantime.

  • Tactical solution is required before strategic (building):
    -tax BTL.
    -introduce Rent Caps
    -Tax landbanking

  • “Only 2% of people wish to be private renters, compared with 82% who want to own, ”

    Why? Because they think that house prices will always rise? Think about what must happen for the price of something to ALWAYS RISE.

  • Helen Dudden 29th Aug '12 - 12:51pm

    Of course the PRS is too expensive and can vary because of the area, and the often lack of control over the standards. I feel that we will have to build on Green Belt, that is going to be a fact. Of course, with the lack of farming as an industry, then will it be a problem if we consider this to be acceptable, in certain area? Selling of Housing Trust property must be stopped they often end up in the private sector and profit from a less than market value property, is hardly the point of the selling in the first place. I feel the problem have been one of the Government in the past, housing and the need to consider for the future is an very important topic.

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