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The growth of PRS - Mangala Murali

Is PRS the answer to England’s growing housing problem?

In the last couple of decades England has seen a spurt in the growth of Private Rented Sector (PRS). Following liberalisation of the housing market in the late 1980s the PRS has grown substantially. Tenancies have increased approximately a fifth from the late 1980s to the mid 1990s.

A new English Housing Survey conducted by the Department for Communities and Local Government (DCLG) for 2009/10 show that 67% of households are owner-occupied, 15.6 % are privately rented and 17% are in social rented accommodation. Government initiatives announced in October 2010 to increase social rents by 80% of market rates are likely to push up demands for PRS with predictions that by 2012 the number of private rented households would totally eclipse the number of socially rented accommodation.

A varied number of factors have contributed to this gradual but dramatic change in the profile of the housing market.

Falling home ownership affordability is undisputedly one of the biggest triggers for people to choose PRS particularly First Time Buyers (FTBs) and young families. High deposit requirements for house purchases and a very restricted mortgage market in recent times has helped shift the situation from one of affordability to one of accessibility.

The previous conservative government’s policy of withdrawing mortgage tax relief (MIRAS) led to increased risks for over leveraged borrowers and to some extend the lenders and led to further reductions in home ownership.

Prospects of slow rising interest rates, public sector job losses, squeezed real personal incomes and aversion to debt make PRS an affordable and tempting choice with lack of long term commitment, ability to move home quickly and a separation of risk of ownership from the enjoyment of property – best of both worlds choice! Therefore PRS tends to be popular with younger/more mobile people.

Latest forecasts indicate PRS has the potential to increase over the next 10 years. The deregulation of PRS from rent controls and security of tenure introduced at the turn of 20th century and the introduction of Assured Shorthold Tenancies helping rents to be set at market levels have all worked favourably for PRS. Globalisation has brought with it an array of socio-economic and demographic changes such as a growing and transient population who prefer to rent privately. The growth of the IT sector has contributed to a significant surge in immigrants and these combined with an increasing student population and those who relocate for employment has created a large chunk of people who consider PRS as their tenure of choice. A perceptive change in attitude (partly forced by circumstances) towards renting amongst the local population has also helped fuel PRS’ popularity. The growth of a vibrant and healthy Buy-to Let mortgage since 1996 with a steady flow of capital into the sector has helped drive up standards providing very conducive conditions for PRS and also gives tenants increasing choice. Approximately, one in six households -3.4 million people use PRS now- an increase of 114 million since 2001. Latest figures show that home ownership and social renting are in decline compared to PRS.

A disproportionate increase in demand compared to supply of houses has encouraged renting. UK population is estimated to grow by 71.6 million by 2033 and there will simply not be enough houses to cater to this requirement. The Association of Residential Letting Agents and Royal Institute of Chartered Surveyors show that demand from landlord investors has been robust and twice as many of them have been prepared to buy in 2011 than sell. According to the Council of Mortgage Lenders (CML) the value of buy to let lending has risen by 22%. Arrears in the sector are declining with landlords benefiting from stable economic conditions, low interest rates and high levels of tenant demands.

The proliferation of PRS thus seems a by product of a non-conducive home ownership market and a rent friendly market. Is this just a passing phase or has it come to stay?

PRS is a life cycle stage for many tenants. Increasing affordability problems are postponing people’s ambitions for owner occupation. According to government estimates nearly half of all renters would prefer to be owner occupiers. The gaping gap between demand and supply of houses for sale are likely to increase in the next 20 years pushing up house prices disproportionately to the income earned by people. However, assumptions based on statistics from people’s preferences, the mortgage market and the general economic trends point to owner- occupation being the preferred choice for many people.

Demand drivers are variable:

Demographic forecasts indicate a much slower growth rate for younger households than for the older age range. 90% of the predicted annual 252000 increase in household numbers between now and 2031 are in the 35 + age range where they are unlikely to be favourites of PRS as older people are more reluctant to move than younger population. They would prefer owner occupation where they are immune from house price rises and benefit from the absence of taxation on imputed rental income.

The guesstimated growth of PRS is shrouded in speculation and with the volatile economic conditions it is difficult to calculate with any precision which side of the clock the pendulum will swing. The one certainty is PRS is here to stay at least for the foreseeable future and may healthily co-exist with home ownership!

Uploaded September 2011

Mangala Murali

Mangala Murali is a graduate member of ILEX with Land Law, Landlord and Tenant Law and Conveyancing as her speciality. She has also completed the Council for Licensed Conveyancing (CLC) qualification. She has worked in the Land Registry for over 20 years and has gained extensive experience in all aspects of Land Registration. She has made valuable contributions to the various consultation exercises on E-Conveyancing and other Land Law related subjects such as the one on Easements, Covenants and Profits a Prendre by the Law Commission. She writes regularly on property law for the Institute of Legal Executives magazine and the Solicitors Journal.

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