In the aftermath of the global financial crisis, a surge in house prices during the 2010s transformed residential property into the world’s largest capital asset and the most lucrative long-term investment. However, the dream of homeownership has faded for many, as unsustainable costs and risks have forced households, particularly the younger generation, to turn to the rental market. According to recent data, a growing proportion of households in the UK, US, and Australia are now choosing to rent, marking a significant shift in housing trends.
The decline in homeownership rates has been especially pronounced among young adults, who have been priced out of the market as it contracts. In the UK, ownership rates among 25 to 34-year-olds have plummeted by half to just 30% in less than two decades. Experts are dubbing this the “post-homeownership” era, with private renting emerging as the go-to alternative, even in the UK where social housing once played a central role.
While the long-awaited renters’ reform bill aims to enhance conditions for tenants by eliminating no-fault evictions, it falls short of addressing the underlying issues plaguing the private rental sector, such as declining supply, poor quality, and rising prices.
Over the past few decades, the UK private rental sector has doubled in size, now accommodating approximately 4.5 million households, or one in five. However, it has struggled to keep up with the demand for high-quality, affordable housing. Notably, the demographics of private renters have shifted, with an increasing number of older individuals, lower-income households, and families with children joining the sector. Unfortunately, the sector has failed to adapt to the needs of this changing demographic.
Compounding the problem is the age of many privately rented homes, with one-third of them built before 1919. Additionally, a quarter of these properties fail to meet the government’s “decent homes” standard, posing significant challenges for vulnerable individuals, particularly those over the age of 55 with limited savings or investments who are at risk of fuel poverty. Moreover, the private rental sector is home to 1.6 million children, often residing in substandard conditions characterized by dampness, mold, excessive cold, overcrowding, and a lack of secure tenancy.
Apart from quality and condition, there is a pressing issue of supply. The private rental sector in the UK is predominantly comprised of small landlords who were drawn into the buy-to-let boom after 1990. However, tax and regulatory changes have deterred these landlords, with a third now intending to sell or downsize their portfolios. Simultaneously, demand for rental properties has risen, causing rental listings to decline by 40% compared to pre-pandemic levels. Consequently, the market has become chaotic, with long queues for property viewings and bidding wars that further drive up costs.
The UK has witnessed significant rent increases across all demographics, outpacing the rest of Europe. In the eight years leading up to December 2022, rental prices surged by nearly 17%, with the latest increase of 4.2% marking the largest spike since the Office for National Statistics launched its rental price index in 2016. As a result, private renters are now allocating a higher proportion of their income towards housing than any other tenure group. A quarter of them struggle to make ends meet, and two-thirds of those over the age of 65 are forced to cut back on essentials.
To address the growing dissatisfaction with the private rental sector’s quality, affordability, supply, and management, attention is turning to large corporate landlords who are expanding their property portfolios and attracting institutional investors like pension funds, listed property companies, and residential real estate investment trusts. These corporate landlords aim to professionalize and grow the sector, potentially through initiatives like bulk buy-to-let. However, this approach does not offer an immediate solution to the supply issue. By the early 2030s, build-to-rent developments are expected to account for only 8% of the private rental sector. Affordability also remains a concern, as large corporate landlords in North America have raised rents, fees, and ancillary revenues while expanding their portfolios. Similar concerns have been voiced in the UK, and Berliners have even voted against this corporate model.
Amidst the challenges faced by the private rental sector, it is crucial to explore more innovative solutions. One key aspect is investing in social housing, which the UK championed a generation ago. Revitalizing the vision and values that drove the social housing movement can help address the present crisis of homelessness and affordability. Furthermore, the concept of housing based on need rather than just financial capability is gaining renewed enthusiasm across the Organisation for Economic Co-operation and Development (OECD).
Another avenue worth considering is incentivizing small landlords to sell their properties to not-for-profit providers. This approach would diversify and expand the community-based housing movement, while corporate landlords could also allocate more of their portfolios to affordable housing. Such measures would provide an opportunity to reform rental housing in a manner that prioritizes tenant well-being and support.
Both the government and the opposition have expressed their focus on a new “generation buy” scheme. In line with this goal, one bank has already reintroduced 100% mortgages. However, it is worth questioning whether traditional homeownership models are still viable. Perhaps it is time for a comprehensive reevaluation.
One potential alternative approach involves allocating a portion of house price appreciation to maintain, decarbonize, and future-proof the housing stock. Rather than viewing homeowners as permanent possessors of properties, they could be positioned as temporary occupants, fostering a sense of stewardship. Implementing such shifts could be funded through reforms in the incoherent tax position of the housing market, ultimately leading to a fairer and more inclusive future.
As the decline in homeownership rates continues to reshape the housing landscape, it is imperative to explore diverse strategies to address the housing crisis. By investing in social housing, empowering community-based initiatives, and reimagining the role of homeownership, society can pave the way for a more sustainable and equitable housing sector.
The current situation demands bold and forward-thinking actions to ensure that everyone has access to safe, affordable, and high-quality housing. Only through collaborative efforts between policymakers, housing providers, and communities can we navigate the evolving dynamics of the rental market and build a housing system that caters to the diverse needs of the population. The time for a comprehensive rethink of housing policies and practices is long overdue.