I am grateful to Paragon Mortgages, whose head office is in my constituency, and to the Association of Residential Letting Agents for the help that they have given me in preparing for the debate.
Private lettings have not always enjoyed the best of reputations, but the days of Mr. Rigsby are, if not gone altogether, not a feature that we recognise as part of the general landscape today. Indeed, as an owner of two multi-occupancy properties in the dim-and-distant past, I know how many constraints and rules apply to the modern landlord. The private rented sector plays a very important social and economic role in the UK, helping to meet housing demand throughout the country. It provides housing for 3.2 million households, representing 12 per cent. of housing tenures, according to figures from the Department for Communities and Local Government. It meets the needs of both those wanting long-term accommodation and those requiring more flexibility.
The Government’s national housing and planning advice unit reported last year that buy-to-let has significantly increased the size of the private rented sector and helped to keep rents low. Those landlords are still comparatively small and lie at the heart of private rented sector provision. Three quarters of landlords are private individuals and couples, according to figures from ARLA. Only 10 per cent. are private companies.
Julie Rugg’s review of the private rented sector for the DCLG recommended that Government policy should help good landlords of all sizes to expand their portfolios. She stressed that that should include smaller landlords as well as larger ones. I look forward to the Government response to the Rugg review, which is expected later this week.
Driven by social and demographic change, the private rented sector now plays an important role in the UK housing market. Landlords have been able to respond to local patterns of demand effectively and efficiently. They offer locally managed responses to local needs.
Institutional investment has been mooted by Government in the form of the private rented sector initiative, which offers institutions interested in the sector an opportunity to invest on a large scale and for the long term. We expect more details of that scheme to come forth as part of the Government response to the Rugg review. However, it may not be the best or at least the only way to increase supply in the sector. The economics may not stack up. Suitable returns may not be made, given the illiquid nature of housing assets and the additional costs with institutional structures. Julie Rugg notes that small-scale landlords inject a great deal of uncosted sweat equity and do not factor in the time they spend managing their properties, in contrast with larger institutional landlords with higher management costs.
Social housing has not kept pace with the UK’s demographic changes. There has been a consistent decline in the provision of local authority social housing since the 1980s. The private rented sector has helped to fill that gap. Social housing accounted for 25 per cent. of stock in 1991 compared with 18 per cent. in 2007, according to DCLG figures.
The majority of the growth in the private rented sector has been funded by buy-to-let mortgages. The number of units in the private rented sector grew from 2.45 million in 2000, to 3.2 million in 2007, coinciding with a significant growth in buy-to-let lending. I want to talk about where the funding comes from for this sector. The sector was the mainstay of specialist lending, especially for landlords operating in the private rented sector.
Specialist non-bank lenders have played an important role in the growth of, and improving standards in, the private rented sector for more than a decade. The number of new loans for buy-to-let house purchase grew from 85,000 in 2002 to 183,000 in 2007, but funding constraints meant that that fell to 103,000 in 2008. Specialist lenders, excluding bank and building society subsidiaries, accounted for more than 20 per cent. of the buy-to-let mortgage market in 2007. By the final quarter of 2008, that had fallen to 0.3 per cent. Those figures are from the Council of Mortgage Lenders.
Non-bank buy-to-let specialist lenders have originated high-quality assets and experience low arrears. In addition, most non-bank buy-to-let lenders have extremely sound balance sheets. Colleagues have drawn attention to the number of recent repossessions in the rented sector, but it is important to note that the majority of those involve owner-occupied mortgages where borrowers have not informed lenders that they are renting, not buy-to-let mortgages.
Let me describe the current context. The credit crunch has resulted in increasing demand for rental property. People are more reluctant or are unable to buy and many are seeking refuge in renting. Figures from the Intermediary Mortgage Lenders Association show that 58 per cent. of first-time buyers were unable to get a mortgage through their broker in the final three months of 2008. Of those, 80 per cent. are opting to rent instead.
The private rented sector will play an increasingly important role as the recession continues. There was a 47 per cent. increase in rental demand in 2008, according to the property website Your Move. Demand from residential property investors is strong at a time when other sectors are showing little appetite for house purchases. Landlord purchasing activity has benefits for the wider housing market, as it could put a floor under falling house prices, and it creates an active market.
However, as more people turn to the private rented sector to meet their housing needs, the availability of buy-to-let lending to finance an expansion of the sector has fallen sharply. That shortage has been caused by the closure of the wholesale funding markets, thus non-bank lenders are not able to resume lending. Many non-bank lenders relied on securitisation to fund new lending; but since markets closed in 2007, no new funds have become available through that route, despite the fact that most non-bank lenders have no exposure to toxic assets.
Figures from the Council of Mortgage Lenders show that new lending for buy-to-let properties has fallen significantly. Of the top 10 buy-to-let lenders in 2007, only two are now writing new business: Lloyds TSB and Nationwide, and Lloyds TSB has signalled a change of buy-to-let strategy, reducing its focus on that sector. Non-bank lenders, which have provided vital competition and driven the market forward, are unable to operate in the market at all. Buy-to-let lending by specialist lenders fell to 0.3 per cent. in the fourth quarter of 2008. Figures released last week by Moneysupermarket show that the number of buy-to-let mortgages available has fallen in two years by 95 per cent.
What are the consequences? The absence of buy-to-let finance for investment in residential property has serious social consequences. At a time when people are looking to the private rented sector to meet their housing needs, the absence of funding has meant that the sector cannot expand to meet that demand. Landlords’ appetite to borrow remains. Considerable funding for the private rented sector has come from the non-bank sector, but that sector is now severely constrained and little new finance is coming in. Specialist non-bank lenders have been excluded from the Government’s lending support initiatives to date. Those lending initiatives have not resulted in any funds being passed through to specialist lenders from banks that have access to the schemes. There is no evidence that the lending commitments agreed by the nationalised and partly nationalised banks will result in the provision of necessary finance to allow the private rented sector to grow.
Existing lending by high street lenders will certainly not be sufficient to fill the gap created by the loss of non-bank capacity. Increased pressure on the private rented sector runs the risk of leading to rental inflation, putting further pressure on tenants. Indeed, the banks that are still lending in the private rented sector are increasing the minimum rent that they require landlords to charge. There is currently a complete lack of competition in that market. Moneysupermarket has referred to the market as a “ticking time bomb”, with the products on offer not reflecting need in the market.
What needs to change? What can we do to ensure that the private rented sector plays a full role in the future? The Government have attempted to stimulate institutional investment, but that is not likely to be the answer. Unsuitable properties are likely to be provided, which will not reflect local demand in the way that can be achieved by more adaptable individual landlords, with the knowledge and experience that come from being embedded in the local community.
We need to find ways to encourage such landlords to increase the supply of private rented sector properties. The answer lies in mortgage funding. Private landlords using buy-to-let finance have responded to demand in the private rented sector in the past, and lenders stand ready to provide the funds needed to meet that demand, but the Government need to help specialist non-banks to access finance.
In the Budget, the Chancellor announced further details of the lending support measures initially announced at the start of the year. Among those measures is the guarantee scheme for asset-backed securities, which is aimed at reviving the UK securitisation market to make more funds available for mortgage lending.
On 19 January, the Prime Minister said that the package of measures that have been proposed
“must be accompanied by action to address all the obstacles that are discouraging and preventing the remaining UK banks from supporting the expansion of lending.”
The package announced by the Chancellor last month will patently fail to achieve that. Buy-to-let is included in the scheme, but the majority of mainstream banks have withdrawn from the sector altogether.
Non-banks are excluded from the scheme, which is exclusively limited to banks and building societies, so specialist lenders, which have used securitisation to lend in key parts of the housing market, such as the private rented sector, are prevented from doing so again. The Government have commented on risk profiles, but the overwhelming majority of non-bank institutions have taken a prudent approach to lending.
There will be no secondary lending effect. Even mainstream banks are proving unwilling to utilise the scheme. The lack of lending in the buy-to-let sector is compounded further by the fact that high street banks are not passing on any new funding to specialist financial institutions.
The private rented sector is not getting the inflow of funds that it badly needs to allow landlords to meet demand. The answer is to include non-bank specialist lenders in the residential mortgage-backed security scheme and to amend scheme eligibility criteria accordingly. Given the protracted nature of the European Commission state aid approval process and the impacts that ordinary people are feeling across the country, it is urgent that the Government seek approval from the Commission as soon as practically possible.
Does the Minister accept that the private rented sector, driven by small landlords, must continue to play a vital role in the housing sector in the coming years? Will he raise three specific questions with his Treasury colleagues? First, why have non-banks, which have provided much of the finance that has driven the growth of the private rented sector, been excluded from the Government scheme? Secondly, will the Government seek approval from Brussels for the inclusion of non-banks in the residential mortgage-backed security guarantee scheme? Finally, will they amend the scheme’s eligibility criteria?
I congratulate the hon. Member for Solihull (Lorely Burt) on securing this important debate. She started by mentioning “Rising Damp” and Rigsby, and I would like to talk about the relationship between Miss Jones and your good self, Mr. Jones, but I am sure that you would rule me out of order, so perhaps I should get on with my contribution.
Aspirations and expectations about home ownership and, importantly, the rights of tenants have risen dramatically in the past half century, and rightly so. Whether people rent or buy, their right to a decent home in a thriving neighbourhood and to fair treatment, regardless of their ownership or tenure status, should be the same. That right underpins the priority that the Government attach to delivering housing across all sectors.
I can answer one of the hon. Lady’s questions about the private rented sector straight away. The Government’s vision for the sector, and our approach in shaping policy, is that the sector should be encouraged to grow and thrive, while ensuring that it is fair to responsible tenants and good, professional landlords, regardless of the size of their properties. Our aim is to harness what the private rented sector has to offer and to address the ways in which it currently fails to meet its potential. In particular, we want to ensure that all groups have a proper choice as to where they live.
That is especially important for the most vulnerable in society. Although social housing will always have a strong role to play in providing for those most in need, we want to know that a family or individual who is looking for housing will also be offered opportunities linked to employment and training. We want to ensure that the advice they receive looks thoroughly at the options they can be offered to meet their housing needs and that, wherever appropriate, such options include housing in the private rented sector.
We also want to be clear about what the private rented sector looks like. We often talk about the sector as some homogenous block—as if it were a single beast—but it is very complex, with interrelated sub-markets. That was one of the issues that we wanted to address when we commissioned an independent review of the private rented sector by Julie Rugg and David Rhodes at the Centre for Housing Policy at York university. They produced their findings in October 2008.
The Rugg review had a wide remit to look at how the sector meets current needs and expectations and at whether and how the experiences of landlords and tenants might be improved. It identified several overarching themes, including the need to improve the sector’s professionalism and increase knowledge and understanding of its various disparate sub-markets. After Julie Rugg produced her report, I went to York university to respond on behalf of the Government. I was struck by her suggestion that landlords should see their properties less as an investment and more as a business. That is a subtle, but profound description of the way in which we should approach the private rented sector.
Within the framework that it provided, the Rugg review also set out a range of what Julie termed “policy directions of travel”. Those included a revised and improved regulatory framework, including a national register for all private landlords and full independently led regulation for letting and managing agents; measures to improve the professionalism of the sector and to encourage the sector to grow, including a package of fiscal proposals and a culture change in local authority engagement with landlords; and better co-ordination of initiatives to procure and sustain private sector tenancies for those in housing need.
The review’s findings were thoughtful and well evidenced, and it has been really positive to see the endorsement that the report has received from all interested groups in the sector. I have since met a wide range of key stakeholders on a one-to-one basis and reflected on what they told us.
The Rugg review is proving robust in the face of the seismic economic changes that have occurred since its publication. Despite the challenges, we have not yet seen evidence that significantly undermines or invalidates its arguments. The review specifically set out a long-term vision for the sector, as well as the ambition of making the sector work more effectively for tenants, landlords and agents.
As the hon. Lady said, the housing market has been hit hard by global financial turbulence, but we have not yet seen the full implications of what that may mean for the rental sector. There is likely to be increased demand, not only from those who cannot currently obtain a mortgage, but, potentially, from more vulnerable groups who can no longer sustain home ownership. With more people, and potentially more vulnerable people, looking for housing in the sector, it is essential to ensure that they get a fair deal—particularly those who do not have the financial ability to walk away from bad landlords.
No one could argue that current conditions are absolutely perfect. Unfortunately, the worst housing is still found in the private rented sector, and that has a disproportionate effect on low-income and vulnerable families. As the Rugg review notes, however, the rental sector is in reasonably good shape overall, and there are many strengths to build on. More than three quarters of people who rent privately are satisfied, and levels of dissatisfaction are actually lower than they are in social housing. Our recent reforms, from the Housing Act 2004 onwards, such as the tenancy deposit protection scheme, have helped to give greater confidence to tenants and landlords alike. Although, unfortunately, unsatisfactory landlords and undesirable tenants exist, they are far from the norm.
We intend to issue in the near future the Government’s response to the Rugg review for consultation and wider debate, and, without pre-empting that response, I think I can share with the House a few of the principles that have informed our thinking. First, as I think I said at the beginning of my remarks, we strongly believe that a strong private rented sector has an important role to play in meeting the country’s future housing needs, so I am anxious that it should no longer be overlooked or marginalised in policy, or seen as somehow “second best” in the popular imagination. It is not in anyone’s interest to think that someone who rents privately has failed as a citizen. That is a wrong and incomplete picture.
Secondly, we believe that creating that stronger, healthier sector depends on supporting good landlords and letting agents so that they can thrive and expand. It is essential in tackling bad landlords that we get a proportionate, measured response. Thirdly, we want to make sure that any reform does not strangle the very strengths that attract people to renting in the first place: the flexibility, choice and diversity of what is on offer. My concern is that the proposals that we put forward might lead people to say, “I will not allow my property to be rented out,” and that the private rented sector would contract. Any policy considerations, as the hon. Lady will be aware, will need to take that aspect of the matter into account. The publication of the Government response will launch a three-month period of consultation, with the widest possible range of organisations and individuals, about the way forward on our package of proposals.
I am very conscious that the debate has focused in particular on the funding of the private rented sector. The sector will, of course, continue to be funded primarily by the rent paid by nearly 3 million tenants to about 1 million landlords in England alone, at a level freely agreed by both parties, as part of the tenancy contract. In some cases that rent will be funded, of course, from housing benefit, which is now local housing allowance. However, the primary contractual relationship remains that between the individual landlord and tenant. The private rented sector is not primarily dependent on the public purse and is proving relatively robust in the face of the shocks that have recently affected owner-occupation. As I have already mentioned, that is one of the strengths of the sector.
Of course—and the hon. Lady dramatically gesticulates about how she might disagree with me on that last point—private renting cannot be insulated from some of the impact of the global downturn, and we have all heard and read of instances of tenants of private landlords becoming subject to repossession proceedings. That is an important part of the remit of my Department. We must keep a careful eye on repossession statistics to make sure that we establish a range of policy responses to minimise the number of repossessions. I think that the hon. Lady alluded to the fact that currently data suggest that buy-to-let landlords are no more likely to be affected than other mortgage holders, and that just 0.1 per cent. of landlords are affected. However, because of the need to protect tenants as well as property owners in those cases, that needs to be monitored very closely, and that is what we are doing. In a few instances, tenants have faced eviction at very short notice—sometimes just a few days—through no fault of their own, when their landlord’s property has been repossessed. That is unacceptable. I am very much aware of the anxiety, hardship and distress that that situation can create, and we are actively looking at what can be done to tackle it.
As I have said, we would like the private rented sector to thrive, expand and offer a housing solution for a growing number of those who are unwilling or unable to buy in the current market. The main theme of the hon. Lady’s speech was the important role that buy-to-let can play in the financing of the private rented sector. Buy-to-let has accompanied an improvement in the quality of homes in the private rented sector—particularly flats. The English house condition survey shows that the proportion of “decent” homes in the sector rose to 55 per cent. in 2007. It is still low, and we still want to do something about it, but that rate of improvement exceeds the rate in the owner-occupied sector. Mortgage lending to fund buy-to-let has, as the hon. Lady said, fallen dramatically in the changed market of recent months but, as rental yields gently rise, in response to the supply-and-demand dynamics, the sector will, I think, prove attractive to professional investors and landlords.
I agree with everything that the Minister has said so far. The problem is that there is huge demand for buy-to-let mortgages, huge demand from tenants, and huge demand from people who want to make the business of buy-to-let their business, but there is no money. The funding has virtually dried up. I hope that in the closing minutes of the debate the Minister will deal with that problem and some of the suggestions that we have made for freeing up a little funding so that the sector can carry out its important function.
The hon. Lady was right on cue there with what I want to suggest. She will be aware of the creation in December 2008 of the Homes and Communities Agency, a powerful national agency working locally with different providers in a flexible way to try to address the needs—the housing and regeneration—of communities. I have said that a key role in housing provision belongs to the private rented sector, so the Homes and Communities Agency has a legitimate interest in it. On that basis, and in that context, I hope that the hon. Lady will join me in welcoming the agency’s launch on 1 May of its private rented sector initiative. That will also form a key part of the package of proposals in our forthcoming response to the Rugg review. I shall make sure that the hon. Lady is aware of that when we publish our response.
The “expressions of interest” process that the HCA has launched could address the points identified by the hon. Lady. Potentially, it will attract significant investment into the housing market by encouraging institutions to fund new homes specifically for private rent. That is important, because, as I have mentioned several times, I want the private rented sector to grow, expand and thrive. I do not necessarily mean that it should increase as a proportion of the existing housing stock. The hon. Lady knows as well as I do that we need more homes. I want to know how to encourage build-to-let and what the mechanisms are by which we can do that, and thus increase the number of homes rented out in the private sector.
The objective of the private rented sector initiative is to create an opportunity for investors such as pension funds to enter the private rented sector on a large scale. That has not happened in this country before, but it is a great opportunity. The reason why I think so is that this point in the economic cycle, where there is strong investor appetite for low-risk investment with a focus on income distribution and a longer-term investment horizon, is the right time to expand the private rented sector and consider its possibilities. The HCA seeks to work with financial institutions and other investors to develop a long-term funding model for new private rental housing in England. It anticipates that the potential investment could come from sources such as pension funds or overseas investors, which have not traditionally been involved in UK residential letting.
The private rented sector initiative could have the potential to help kick-start stalled development schemes and lead to a significant increase in high-quality new homes for rent. The hon. Lady will be aware of the £400 million announced by the Chancellor in the Budget to help kick-start stalled developments and make sure we have the housing delivery that the country needs. The private rented sector could play a part in that.
Is the Minister saying that the new initiative will provide funding for buy-to-let for those individuals whom I have referred to, who are already the backbone of the buy-to-let industry in this country, and who are being starved of funds? Alternatively, is he referring to a hands-off management company funded by pension funds and other investors in large-scale long-term developments?
As to the prospect of the HCA providing mortgages for buy-to-let investors, it is early days, but I should have to say that that is not probable. One thing that we are trying to do is encourage, as much as possible, large-scale institutional investment. However, smaller landlords have a role to play as well. As I mentioned, it is important in the funding model that we should take into account the scale, and the variety of scale, in the private rented sector.
I welcome the debate, which is an important one. At a time of major change the private rented sector has the opportunity to grow in importance as part of our overall housing supply and housing offer, and to increase in professionalism, scale and quality. I look forward to working with the hon. Lady and others to make sure that we can realise that vision.
Sitting adjourned without Question put (Standing Order No. 10(11)).