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Is the private rented sector really in decline?

Analysis

Published: 30 March 2016 | Author: Mohammad Jamei

New data from the English Housing Survey showed that in 2014-15, the number of households in the private rented sector fell by 100,000. There was no corresponding increase in the number of people buying with a mortgage, which fell quite sharply too (by more than 80,000). In fact, this drop was reflected almost one-for-one with a drop in the overall number of households.

As an organisation which is tenure neutral, we found these numbers puzzling, and the implication that the private rented sector was shrinking a cause for concern.

When it comes to interpreting the numbers, some care should be taken as the data can be volatile between consecutive years (see Chart 1). For this reason, commentators generally look at three-year moving averages to get a better underlying idea of what is going on. This is especially instructive on this occasion, given that the reported increase in the total number of households in the previous year 2013-14 was three times larger than expected, at 640,000.

Chart 1: Changes in estimated number of households, thousands

Chart showing changes in estimated number of households, thousands

Source: English Housing Survey, CML calculations

Download the data

Behind the annual headline figures, the general trends that we have seen over the past 15 years are continuing. The number of people owning their house outright is increasing, the number of people with a mortgage is falling, and the private rented sector is growing. So, we see this year’s data as more of a blip, rather than a reversal of these trends.

A growing private rented sector has long been a characteristic of the English housing market. Over the past 15 years, the sector has more than doubled, from two million households to the latest data showing 4.3 million households living in privately rented accommodation. The private rented sector is now the second largest tenure.

What drives the rental sector?

This should not be a surprise, as rental demand has been, and continues to be, very strong. There are a range of factors in the UK economy helping to drive this, including:

  • social and demographic changes, with increasing life expectancy and a growing number of  people living by themselves;
  • change in lifestyle, with some opting to settle down later in life and others remaining in education for longer;
  • population growth;
  • economic migration; and
  • those relocating for work reasons.

Added to this mix are factors related to the housing market, such as the decline in social housing, limited new-build activity and growing affordability issues for would-be first-time buyers.

Who lives in privately rented accommodation?

The decline in social housing means the private rented sector is now housing many people who would perhaps otherwise have been in social housing. More than one in four private renters were in receipt of housing benefits in 2014-15. The proportion has been growing for the past seven years, and looks set to continue.

The affordability issue has been exacerbated by house prices growing at a rate that has outpaced earnings for much of the last 15 years, coupled with a limited recovery in high loan-to-value mortgage availability post-crisis. This means that would-be first-time buyers now need to save for longer for a deposit, with many staying in rented accommodation for a longer period of time.

Taking these factors together shows that the private rented sector is helping to house those aspiring to buy, those who may not want to buy or cannot afford to, and transient cohorts such as students.

The sector is also very diverse, helping to house those living alone or with others, with or without dependents, retired or still working. The demand for housing from all of these groups has increased and does not look likely to abate anytime soon.

Table 1: Growth in privately renting households, by category, 000s

 

2000-01

2014-15

Growth rate

Couple, no dependent children

488

982

101%

Couple with dependent children

276

978

254%

Lone parent with dependent children

178

571

221%

Other multi-person households

309

599

94%

One person under 60

768

848

10%

One person aged 60 or over

167

301

80%

 

Source: Survey of English Housing, English Housing Survey, CML calculations

Given current and predicted household formation rates, housing need across all tenures is set to increase. But new-build construction rates continue to fall well short of prospective requirements.

While the government has signalled a preference for home-ownership, we do not think this should come at the expense of the private rented sector. We have already alerted government to the prospect that its proposal of introducing higher stamp duty for second properties could result in higher rents and fewer properties available for rent on the market.

Notwithstanding stamp duty rate rises and upcoming tax and regulatory changes affecting buy-to-let, we still expect the sector will continue to grow, as highlighted in our forecast. But we expect future growth to be at a slower rate than we have seen recently.