How a transition from private to public rental could save UK renters and taxpayers £40bn per year
The semi-privatisation of the British rental sector is costing renters around £35bn more in payments per year than if that housing were rented from the public sector
It is also costing the UK taxpayer around £6bn more per year in housing benefit payments.
So why on Earth don’t we change it?
Below I set out, in terms of the numbers at least, how a transition from private to public/community housing can be achieved in a way that is fair to current landlords, reduces rents for renters and reduces costs to the UK taxpayer.
Let’s start with the current private rented sector:
There are approximately 5.52 million households in the UK that rent their home from a private landlord. They pay, on average £11,500 per year in rent , making a total annual payment of £63.6bn across the entire private rented sector.
So would renting the same homes from a public landlord be any cheaper?
If we assume that each of these 5.52 million homes is worth, on average, the same as other UK homes: £230,000 (in reality they are probably worth less, but let’s make things a bit tougher for ourselves by assuming the same value), that makes a total current value of £1,269bn.
If the UK public authorities (local or central government), or other bodies such as Housing Associations, Co-operatives or community groups were to purchase this entire stock of homes at low rates of interest, it could pass on massive savings to the tenant.
How much depends on the form of finance.
The first option for government is the traditional route of borrowing money on the bond markets. Currently, the interest that government pays on a 30 year bond is 1.25%. At that rate, it would cost around £15.8bn to service this debt on an ongoing basis
Alternatively, the Bank of England could buy the bonds directly from housing authorities or indeed the government (it has made similar purchases previously to the tune of over £745bn). The bonds still pay the interest, but the BoE returns any profit to the UK Treasury, so the eventual cost is very low/zero.
The third option is for local authorities, housing associations and community groups to raise their own ‘community bonds’. There could be significant demand for this kind of bond if it were backed by housing stock and the reliable revenue stream (rent) it generates. If we assume these community bonds would pay more than government (say 2% per year), they would cost around £25.4bn to service.
In reality, there is likely to be a mix of all three options. It’s impossible to say what that mix would be, so let’s simply assume the median point in the above range of £0 to £25bn per year. (So, £12.5bn in total or £2,264 per property)
If we assume a maintenance, service and admin cost for each home of about £3,000* per year, that would mean a total cost of £5,264 (or £29bn across the entire private rented sector).
*I have had lots of challenges on this number, so have chosen the higher end of estimates that have been suggested.
So, instead of costing £11,500 per year to rent the average private rented home, it would cost between £5,264 to rent it from a public or community body: a saving per household of £6,236, or over £500 per month. This assumes that the public/community bodies take no profit from the transaction.
And taken as a national total; instead of spending £63.6bn per year on rent, these households would be spending just £29bn.
So, assuming current prices, interest rates and household data remains constant, the public sector could provide rented accommodation to families and individuals at around 1/2 the total cost that the private sector currently is.
In addition, the £12bn the UK taxpayer currently spends on Housing Benefit to those renting privately could almost certainly be reduced by a similar amount, creating a £6bn saving for the taxpayer.
So where’s the catch?
Of course, any of these variables could change, so the ultimate saving could fluctuate depending on movements in house prices, rent levels, bond yields, numbers of people renting etc.
But as it stands today, renters could save around £35bn per year in rent* and the taxpayer could save around £6bn in benefit payments if we were to switch wholesale from private provision of rented homes, to public provision.
Of course, it is highly unlikely that the entire private rental housing stock will move into public hands, but the example above illustrates just how much renters and taxpayers would save if it did….
*This calculation assumes the capital/original borrowing is not paid off, only serviced. After 30 years the debt will become payable, or more likely it will be refinanced. This might be at a higher rate of interest, but long term public bond yields are generally among the cheapest form of finance around, so that’s only likely to be an issue in the context of much broader economic problems. Also, the debt is held against an asset (housing stock/land) that never loses its value relative to the broader economy. Basically, it’s a very very low risk, which is why 50 year bond yields are even lower than 30 year ones (i.e. the financial markets think the risk is actually negative).
The winners are obvious, but who loses?
Clearly, anybody aiming to live off the proceeds of their Buy To Let properties in the future will now not have that revenue stream available to them. They’ll have to invest in productive businesses and assets instead. This is entirely a good thing.
In addition, every private landlord will be able to sell up at current (high) prices. That will represent a very lucrative exit strategy for the vast majority who would be very sensible to take it. It comes with the added advantage to the tax payer that any profits made will be subject to a 28% capital gains tax. But this is not punitive. Both the landlord selling up and the government will be able to take their pound of flesh.
Investors in government or community bonds will receive only a very modest return, but, in the current unstable climate, this also seems only fair. The reason government bond yields are currently so low is that many other assets are overvalued, or at great risk of falling in value. By conceding a small amount of value over a longer period of time, investors get a degree of security other assets will not provide at the moment
So each stakeholder in this transaction has potential costs and benefits to weigh up:
- Renters will pay what it costs to rent and maintain the property, but see a significant boost to their disposable incomes after housing costs
- Investors buying UK gov’t bonds will be able to protect the value of their assets, but likely not makes gains beyond that
- Landlords will be able to exit the market with their previous gains, but forego future rent-seeking/wealth extraction
- The government might take on board extra debt, but not be repaying or servicing it (the rental income will do that). Similarly, they will see savings in taxpayer funding benefits, and a short-term windfall from all those realised BTL gains
So renters are the big winners in this scenario; with landlords breaking even by realising the value of their asset; investors trading some value in return for a secure future income; and government gaining some savings and tax revenue in return for underwriting the change.
So what are the real obstacles to this important and necessary change?
You could probably fill this one in yourself.
The most obvious obstacles are all political:
- The landlord and landowner lobby is very strong and punches well above its weight. Not only are 20% of Members of Parliament landlords (they make up less than 5% of the total UK adult population), virtually every MP is a homeowner and the vast majority have shared in the bounty of the UK property market. That extra £35bn in excess rental payments is currently flowing to a small, but wealthy section of society, and they are not going to give it up without a fight.
- A failure of political imagination. Many who support this idea, probably want collective control of most of the economy: those who oppose it probably want to privatise every element of the economy. In between those two points, it’s not easy to gain a hearing for an idea that would increase the collective control of the nation’s assets, but would also free up millions of people to spend more of their own money as they see fit and provide a huge boost to the productive private sector.
- It’s a big change with big numbers, making it easier to spook people into opposing it. All change can seem scary, so big change can often seem terrifying.
And how can we get over those obstacles?
I don’t have a complete response to the challenges that each of these obstacles provide, but here’s my starting point for each
- There are about 12 million private renters in the UK and 2.5 million landlords. The political numbers should be on our side, if we can rally those renters behind a single proposal. The current government was elected by just 14 million voters, so that lobby of 12 million has enormous power, if only it were to realise it.
- Stressing savings to households and government might be a way to address the pointless polarity that infects all political discourse at the moment. This move is not about big government or bashing private enterprise, it’s about empowering individuals, families & local communities and boosting productive private efforts. If we present this approach as merely a sop to the Left and those who see collective control as the answer to everything, it will probably never get out of the gate, so we will need to find a more inclusive framing. Similarly, most renters ultimately want to own their own home, so we could facilitate that aspiration; tweaking this model to allow renters to buy the property under the same deal (low interest, but they pay off the capital over time, or at the end of a specific term, if they want to own) or perhaps using the Community Land Trust model.
- This can be a gradual change over 5+ years and it will be driven by landlords wanting to exit. All landlords are in the game for the free money: if we signal the end of free money in the future, but give them the option to leave with the free money they have made so far, only the foolish will stick around. But we need to be careful not to be punitive — we can’t rewrite the past so let’s settle up while the cost of doing so is extremely low, and move towards a much better model of housing
The numbers don’t lie
But they do move around..
There is almost no other area of public policy where the numbers point so emphatically towards a radical solution. I’d be happy to hear a counter argument to the solution outlined above because I was genuinely surprised at just how stark the choice was when I set out to calculate it.
But not everyone likes radical. People mostly like simple solutions that they can apply themselves to their own lives. So let’s make housing all about the choices the individual, family and community can make, and not about creating an all powerful government.
Let’s use this idea to redistribute power from landlords to tenants and their communities, not to government. Government can and should be the administrator of the housing market on behalf of the people, not a super-landlord. The governance of this proposal must be all about the tenant and the choices they want to make, and not about political ideology or yet another battle of the state v the market.
For the first time in half a century let’s make homes about people and not profit.
Martin Farley is a member of the Green Party of England and Wales, and the Convener of its Tax and Fiscal Policy Working Group