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Does it make sense to subsidise private renting? Matthew Warburton - 18/01/2013

Private_rent_300The government's national housing strategy, published in 2011, put the case for an enhanced private rented sector.  Sir Adrian Montague was tasked with identifying the barriers to large-scale institutional investment in private rented housing and suggesting how they can be removed.  His report last summer was followed by the government's announcement in September of a new fund to guarantee investment in market, as well as affordable rented housing, and action against what were portrayed as unreasonable section 106 requirements for affordable housing in new developments.

Over the same period, housing associations have been starved of funds for new development, and the government has seen fit to remain almost completely silent on the potential of self-financing to allow councils to play a much larger role in new provision.  To the extent that any defence is offered of this position it is that the overriding priority of reducing the fiscal deficit precludes making more public money available for investment in social housing.

A look at the basic economics of housing suggests that this is only true on a short-term perspective.  There are good reasons to promote a greater supply of higher quality, better managed homes for market rent to respond to meet the needs of households denied access to home ownership by house price inflation, higher deposit requirements and mortgage restrictions, or who do not wish to become home owners just yet.   To the extent that these are households ineligible for housing benefit, the public costs of this policy relate only to whatever action is taken to catalyse the initial provision of homes for market rent.

But promotion of private rented housing as a long-term option for tenants eligible for benefit makes much less sense.  Economics tells us that private landlords will expect rents to deliver a market return on the current value of their properties.  If house prices rise, so will market rents.  If they did not, selling would become a better option than continuing to let, and one which landlords would sooner  or later take up.   Supporting such rents through housing benefit means that the government is helping to underpin and reinforce excessive house price inflation, and provide private landlords with an income which yields a growing surplus over what they need to manage and maintain their properties and repay any loan they took out to acquire or build it.

A social landlord, council or housing association, only needs a rent income sufficient to cover management, maintenance and debt servicing.  Where rents are set to rise in line with or ahead of inflation, the implication is that properties will yield a growing surplus that is available, not to line the landlord's pocket, but for investment in additional homes.  An injection of government subsidy may be needed up front to allow for sub-market rents, but in due course these homes will go on to pay for themselves - perhaps with a contribution from housing benefit, but one that is tied to a social and not a market rent.      

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