The Return of the Rentier?

by Ken Gibb

I read Will Self’s thought-provoking piece on housing in the FT at the weekend (A rentier nation’s fading dreams of home). Home ownership has peaked and is now at a 25 year low; while, at the same time, this has been redistributed into the quickly growing buy to let rental market and hence the new rentiers of the title. Self argues that the visible growth in new rental apartments, the normality of renting in the market (he describes the experience of his son in Hoxton, London), and the importance of the recycling for former council homes into the rental market – are symbols of the fading of the nation of home owners and the new rentier Britain.

This comment piece is a vivid polemic, colourfully described in terms of images of Pooterism and Dickens’ character Wemmick – the latter had a suburban home that was indeed a (mock) castle. It is anecdotal rather than scientific but that is fair enough for a piece setting out to challenge the reader. While the comment piece was a little metrocentric, Self does cover a broad canvas and in particular seeks to make the case that we may have passed a tipping point of sorts that is moving the UK away from its long term relationship with home ownership. I am not convinced but it is an argument worth exploring.

Critically, Will Self argues that: ‘The idea that we can make a smooth transition from a society in which the homeowner is seen as the metaphoric as well as the literal pillar of the community to one in which everyone rents presupposes we are happy to regard our homes as not only non-fungible but not even transferable; which in turn implies a shift in a range of other cultural values. And I believe cultural values, rather than the mechanical drivers of economic theory, are the operative factors here.’ Add a ‘Discuss’ to the end of that great quote and you have a pretty mean essay question.

How would I answer such a question?

There is a sense that a large number of households have become used to not owning (who might previously have done so) – but do not own fundamentally because it is ruled out financially. They cannot afford to own if they want to live in a given high cost area. That is not the same as a culture shift to renting across society. While it is clearly something important for a growing generation of people, where it applies, it is still largely the outcome of a decision driven by constraints, not preferences. But I do not deny the importance of the growing group of non-owners (and new landlords). The media, the political class and, I believe, the great majority of households still undoubtedly hold home ownership up but are currently in a form of cognitive dissonance in that they want to promote owner-occupation but at least in part or implicitly recognise the deeply dysfunctional nature of the housing policy, tax policy and unaffordable prices that underpin it.

What about the new rentiers? Private renting in the UK as in many countries relies on many small-scale landlords, many of whom are amateurs. Few countries have successfully shifted the sector into large scale institutionally-funded corporate landlords (though that does not mean it might not yet happen because of market forces, complementary policies and relative rates of return moving in such a way as to make it more attractive). Until this does happen, however, there will be a preponderance of small buy to let landlords, some of whom are reluctant landlords but many are established and probably in for the long haul.

And yet, even as recently as the 1960s, the private renting sector in the UK was truly large (more than a quarter of all homes) and made up of many thousands of small scale landlords. What we see emerging today is less a new phenomenon and more the return of something actually both familiar and numerous in British society. However, the sector now is still smaller than it was even in the 1960s and the balance of probabilities suggest to me that from here on the main inroads will be from corporate landlords as the sector continues to grow and normalise into the future.

Will Self rightly points to the unintended consequences of the Right to Buy, in particular, the recycling of many of these properties into the rental market (something my colleague Nigel Sprigings has done much good work on in recent years). I find the interesting thing about this, and was also struck by it when reading the FT editorial on housing the other day, that the Thatcher project wanted to create an entrepreneurial Britain by facilitating property owners and also by encouraging share ownership. While there was a cumulative, major redistribution of wealth through the right to buy but mainly through rising real house prices, the share ownership growth was in safe privatized public utilities, largely quickly sold on for a profit – hardly an entrepreneurial rebirth. But in the future rental market growth may be in the form of corporate landlords who will often be public companies, such as REITs – and many individuals may become indirect investors in rental property though share ownership rather than traditional rentier landlords. More radically, perhaps more investors in the future will seek to hold housing assets in the form of bonds rather than actually letting property directly.

Are cultural forces more important here than economic drivers; are preferences more significant than constraints? To paraphrase Ben Goldacre, I think it is a little more complicated than that. But it is not just economic determinism (the role of constraints shaping housing choices in an increasingly unaffordable and credit limited housing market). The changes in the housing market are uneven, cumulative and context-specific. They reflect the complex interplay of choices consisting of both our preferences (wherever they come from) but also our constraints in terms of incomes, prices and our liquidity.

I argued in an earlier post that long term international evidence, including the UK, is suggestive that long term real house price trends are worsening, and may be doing so at an increasing rate. So, by dint of ever-worsening affordability, home ownership may have passed its peak and rental markets may have to grow to accommodate new and moving households. But this does not necessarily imply rentier-led, poor quality expensive insecure private renting for the masses. A groundswell of opposition means that high rents and short tenancies are becoming as politically unacceptable as bad landlords and poor conditions have long been. There is a legislative process underway in Scotland consulting over balanced regulation. I am the last person to call for first generation hard rent controls but the politics of the Housing Benefit cost of low income private tenants and unreasonably short tenancies do seem to offer a window for trading off rent increases with longer tenancies given reasonable landlord rights over eviction. Tying this to better quality standards of accommodation need not frighten away investors – but it needs to be carefully thought through and incentivised.

Perhaps a further question arising from the Will Self comment piece is what a large scale market rental sector would mean for the UK, in terms of its policy requirements, its impact on labour markets, cities and neighbourhoods? How would the (mainly local) state seek to manage and regulate it? How would it change attitudes to savings and investments if we are no longer funnelling everything into chiefly second hand homes to own?