Shrink the PRS: Part I

The Week in Housing 16/09/22

Every so often you read something that puts into words ideas that you have been half-thinking without being able to articulate. That was how I felt reading a recent publication by the Joseph Rowntree Foundation, Making a house a home: Why policy must focus on the ownership and distribution of housing. The paper sets out the thinking behind a new research project which, while focused on England, is very relevant to the Irish context.

There are four key things about how the paper approaches ‘the housing question’ that caught my attention: (1) It is an example of ‘systems thinking’ in housing analysis, something I have written about before; (2) it is focused on the distribution of housing, rather than supply; (3) it explicitly advocates a reduced role for the PRS; and (4) it highlights the potential of interventions in the secondary market (i.e. second hand homes).

In today’s issue I focus on these four aspects, all of which I think can really help how we think about what’s happening in Ireland. Next week, I’ll look at the specific policy framework suggested (albeit tentatively) in the paper.

But first, let’s look at the context as authors Darren Baxter-Clow, Joseph Elliott and Rachelle Earwaker understand it. Central here is the decline of homeownership. The authors note that house prices have risen from just under 5 times the median salary in England in 2002 to almost 9 times in 2021. In addition, access to mortgage credit has become more difficult as banks shifted to more conservative practices following the GFC, partially led by policy and financial regulation. While not as stringent as the Irish macroprudential rules, the proportion of mortgage lending at 90% or higher LTVs has fallen markedly. Thus, ‘even as house prices fell in the latter part of the 2000s, the required deposit size increased’. Unsurprisingly, therefore, 67% of people between 25 and 34 cite getting a deposit together as the biggest obstacle to buying.

Middle income households have seen the biggest decline in the proportion of homeowners. Moreover, the proportion of social renting households has also declined. Back in 1980 31% of English households were social renters, today that has fallen to 17% (in Ireland that figure fell from around 20% in the ‘70s to about 10% today).

As a consequence of the above, there are more households looking to rent today. But the supply side has also changed in England. As in Ireland, there has been an increase in landlord investment over the last two decades driven by ‘de-regulation, market conditions, and the desirability of housing as an asset’. The authors argue that the financial system has shifted towards biasing lending towards households with existing equity or who want to invest.

Here there is a contrast with our experience in Ireland. As I noted recently, BTL investment has more or less disappeared here since the GFC due to the extremely high arrears in the sector and our macroprudential rules. Although the data is patchy, it appears that the expansion of small-scale landlordism in Ireland post-GFC was mainly based on cash purchasers between around 2012 and 2016, and is currently declining. Conversely, institutional investment has continued to grow.

Returning to the analysis set out in the paper, the decline of homeownership and the growth of renting is a problem because renting is unstable and expensive. Moreover, ‘research with 18- to 40-year-olds found that the most common reasons that people cited as reasons for owning were because it provides security, allows a way to preserve wealth, and because it is cheaper than renting’.

The authors reject the argument that supply alone can address the issue. The paper’s take on this thorny question – usually at the heart of any debate on housing policy – is nuanced and worth delving into:

“[A]ddressing housing costs through supply will be a generational project – with most modelling assuming timescales of 25 to 30 years. This means that without additional action, households struggling now will see little immediate relief from an approach focused on supply alone. While, adding more supply into a system alone, particularly when that system is biased towards investors over those looking to purchase their own home, will do little to challenge the distributional issues we have described so far”.

The authors support increased supply, but they argue that a focus on the distribution of housing can achieve results more quickly and equitably. Essentially, their key critique of the current set of issues is that they derive from the concertation of ownership of residential property assets, and that this is what must be addressed. This concertation has brought to the fore the weaknesses of the PRS. The authors make a point I find extremely valuable in the Irish context: focusing on policies to improve the PRS (while valuable and important) ‘obscures the structural consequences of our current reliance on the private rented market’.

They see two key issues with the PRS. First, a sector dominated by small-scale investors is prone to churn, which in turn leads to instability. As in Ireland, ‘a landlord selling the home has consistently been the biggest reason tenants leaving a private rented tenancy presented as homeless’. Second, PRS investment demand drives up house prices.

I think we can actually go much further in our critique of the PRS: it creates a power relation between landlord and tenant that is difficult to regulate, prone to conflict and undermines security, not to mention the poor standard of properties in the sector and the challenges of upgrading them.

The paper thus articulates an argument I have become increasingly convinced of: the PRS is too big and policy should explicitly target reducing it. From this point of view, the way we think about the exit of small-scale landlords from the sector might be reconsidered. As the authors note, ‘private landlords do not, except on the margins, increase the supply of new homes and homes removed from the private rental market do not disappear. Instead, these homes can be bought and utilised by new owners’.

The PRS can and should be reformed, but it will quite simply never be as effective as other tenures in meeting the fundamental needs of most households (security), is difficult to regulate, is expensive (and will likely remain so in the context of financialization), and drives up house prices by making housing an investment asset. It also generates wealth inequality.

On the basis of this analysis, the authors argue that policy should incentivise a landlord ‘exodus’ and actively intervene in the secondary market to shift properties from landlords to first time buyers, local authorities and housing associations. Access to homeownership should also be widened. In short, policy needs to explicitly redistribute residential property. Next week, we’ll look at the specific policy framework they advocate.

Events

A reminder that on September 22nd Public Policy Exchange have a webinar on supporting tenants through the cost of living crisis. On the evening of the 22nd, the Dublin Inquirer (which provides amazing reporting on housing issues) will host a live session in Rialto. On September 29th the Housing Agency are holding a seminar on tenant engagement, something they recently published new research on. The Housing Agency have also published some really useful data on the timely issue of student accommodation as part of their data insight series. Finally, a new report on Irish responses to homelessness is being launch on Monday 19th.

What I’m Reading

My RTE Brainstorm piece looking at the political economy of landlordism was published on Monday. Threshold’s pre-budget submission has just been published, as have the new CSO PPR figures on house prices. Last week the Scottish Government announced a rent freeze for private and social rented housing. An interesting piece here on the impacts of this on social housing finances, which sheds light on the complex relationship between rents, housing provision and future investment. A really interesting new paper that provides a ‘systemic scoping exercise’ on the issue of housing inequality, and is a good companion piece to this new article on ‘housing inequality in the long run’.