Private-to-Public Buyback and Retrofit Housing proposal
Allowing public and community bodies to buyback and retrofit private rental homes will save renters and taxpayers £40bn per year, while reducing CO2 emissions and driving economic recovery in every part of the UK
Representation to the Comprehensive Spending Review 2020
(Photo By Dave Eagle, CC BY-SA 2.0)
Summary
This representation to the UK government’s Comprehensive Spending Review 2020 proposes that the UK government provides central (or supports local) financing to fund the transfer of private rented sector (PRS) homes to the public and social/community housing sector and retrofit each home to a near zero carbon standard.
The purpose of this policy would be to:
- Reduce the cost of renting a home privately
- Improve the comfort and energy efficiency standards of these homes
- Significantly reduce greenhouse gas emissions
- Improve the security of tenure for tenants
- Improve the health and wellbeing of tenants
- Provide employment and business opportunities in every part of the UK
- Increase the skills of UK workers and effectiveness of UK technologies in achieving net zero carbon emissions.
- Drive innovation in a key and growing sector
This will be achieved by:
1) Issuing government finance to provide the funds necessary to acquire private rented homes from private landlords wishing to exit the property market
2) Retrofitting these homes to a high standard (comfort and energy performance)
3) Renting or selling them to tenants at reduced rates via local/community housing bodies
Current context
PRS housing is expensive and energy inefficient, while much is in poor condition.
The sector consists of many small landlords, often renting one or two homes. These landlords tend to have limited access to cheap, patient capital. Weak regulation means they have limited incentives to upgrade properties, but limited access to affordable housing means that landlords can charge high rents.
There is a clear need to improve this housing to:
a) Make it Near-Zero Carbon to help the UK meet its net zero carbon targets
b) Reduce its cost to tenants to make housing more affordable.
There are signs that existing small scale Buy-to-Let landlords are looking to exit the housing market in increasing numbers[1]. Legal, regulatory and tax changes have all prompted landlords to sell up and invest elsewhere.
At the same time, public and housing association borrowing is becoming cheaper[2], meaning that it is becoming increasingly cost effective for public or social providers to purchase these homes and expand their own housing stock
The problem with PRS Homes are:
- They are expensive to rent. PRS households in England currently spend an average of 41% of household disposable income on rent alone[3].
- The majority of private rental properties are energy inefficient, emitting large amounts of carbon — Only 27% of PRS dwellings have an Energy Efficiency Rating in the decent quality A-C bands, with only 1.5% in the A band[4].
- Many are in poor condition. The private rented sector had the highest proportion of non-decent homes in 2017, at 27%[5].
This proposal will address each of these problems by improving the quality and lowering the cost of living in these homes.
How far should we go?
The calculations below show the cost of shifting the entire PRS into the public/social sector (or at least renting and selling them via public, community or not-for-profit bodies). This is purely to give a sense of the scale of the improvement that could be made, but also to enable us to calculate the costs for the ‘average’ home. This representation is not assuming that all PRS homes will be transferred and retrofitted, but rather giving an explanation of what the benefits would be if they were.
A realistic goal in terms of homes transferred and retrofitted in the next few years, on a scale that would be necessary to achieve the points listed in the opening paragraph, might be as any as half (2.6 million). Nonetheless, the savings are so significant for each home that we should aim for it to be as many as is practically possible.
The cost of purchasing PRS homes
There are approximately 5.52 million households in the UK that rent their home from a private landlord[6]. They pay, on average £11,500 per year in rent[7], making a total annual payment of £63.6bn across the entire private rented sector.
If we assume that each of these 5.52 million homes is worth, on average, the same as other UK homes (£230,000[8]), that makes a total current market value/cost of purchasing them, of £1,269bn (of course the actual total value might be different from this, but probably not significantly).
The cost of retrofitting PRS homes
The government’s own estimate of retrofitting homes suggests that a comprehensive retrofit to improve energy efficiency on a standard semi-detached/end of terrace home could be at least £25,000[9].
One housing association has put the figure at £20,000[10], but it also suggests this is probably lower than the average. The precise figure in unknowable without a deep analysis of the UK’s PRS housing stock, and an assessment of the retrofitting required in each case.
But, many of these homes might already have some degree of insulation, double glazing and/or efficient modern boilers, so it is unlikely that every home would require this level of investment. According to the government’s own energy efficiency statistics, 70% of properties with cavity walls already have cavity wall insulation, while 66% of those with lofts already have loft insulation[11].
Given this, for the purposes of this representation we will assume the government estimate of £25,000 per home to be the average requirement. This would mean a total cost across the entire PRS stock of £138bn (£25k x 5.52m homes).
Financing the BuyBack proposal
Government Gilts
If government were to purchase the entire PRS stock (£1,269bn) and pay for zero-carbon retrofitting for each home (£138bn), the total cost would be £1,407bn.
Assuming all of this finance was raised by issuing government gilts/bonds in the normal way (using current government rates for 30 year+ bonds of 0.861%[12], plus perhaps adding an extra 0.5% to factor in the cost of issuing the extra debt, so that the assumed repayment cost would be about 1.36%), the cost of servicing that debt would be £19.1bn per year, or an average base rent of £3,460 per property
If we assume the cost of maintenance and servicing of those properties is around £3,000 per annum[13], that would mean a total cost of £6,460 per property. This is £5,040 below the £11,500 per year paid by tenants currently.
In addition, the average fuel bill of £1,254 per year[14] would fall significantly as a result of the improved energy efficiency of each home. If we assume a modest 30% saving (it should be much higher in reality), that would mean bills falling by around £375 per year (so a total saving to the tenant household of around £5,415 per year)
These calculations assumes current bond rates, property prices, maintenance costs and household data, and also that the housing provider takes no profit from the rental or sale of these properties.
Monetary financing
However, the government has another option.
It could instruct the Bank of England to purchase housing bonds that were raised to fund the buyback and retrofit of these homes. It has already used this approach (more commonly referred to as Quantitative Easing) to purchase £745bn of bonds the last 11 years[15]
This has the advantage that the interest paid to service the debt would be paid direct to government, rather than private investors: i.e. an asset would be created for the taxpayer and the £19bn interest payments per year would add to the government’s fiscal revenues, or could be passed on to the taxpayer in the form of a tax reduction.
This approach could see the rate of interest on repayments vary, so might not be as suitable for this kind of long term project. However, it could be one element of a broader financial package that provides the right mix of stability and flexibility.
Housing Bonds
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 from private institutional investors, if it were backed by valuable housing stock and the reliable revenue stream (rent) it generates.
If we assume these community bonds would pay slightly more than government (say 2% per year), they would cost around £28bn in total, or £5,000 per home, per year to service. Add in the £3,000 maintenance/service costs, and that would see the average tenant paying £8,000 per year. This is still £3,500 lower than currently, which combined with the fuel saving of at least £375, would see a total saving of around £3,875 per year per tenant household.
It is possible at the moment for local authorities to borrow or issue bonds in accordance with the Prudential Borrowing Code[16], but in order to raise the level of funds envisaged here, it is likely that either the Code would need to be relaxed or that central government in some way underwrites or supports local authorities to achieve the required scale of borrowing and low rates of interest.
For such a large scale investment programme, the first option might be preferable, but there could be a mix of all three funding options. All scenarios will probably require financial backing from central government or the Bank of England in order to keep rates and costs as low as possible.
Grants
This representation is not proposing that central government provides taxpayer funded grants to support the buyback and retrofit of PRS homes, as it has done for owner occupier retrofitting[17]. This represents relatively poor value for money for the taxpayer, and is not affordable at a scale required to meet our net zero carbon commitments.
Who pays for this investment?
Ultimately, like any successful investment, this would be funded by the savings it generates (lower rents and fuel bills) and/or the revenue stream it creates (i.e. the rents paid by tenants)
This programme would always be self-funding if the rents were set at a level required to cover all debt servicing costs. At the end of the repayment period (in this example, 30 years), the debt could be refinanced, and rents reset at a level that would cover the new servicing costs.
If rents were increased each year of the 30 year period at a very modest rate, this could also generate significant revenue to help repay the debt, or reduce the cost of future financing: i.e. if the new low average base rent of £3,460 was increased by just 2% per year over the 30 year lifetime of the bond, this would generate an extra £230bn in revenue, but only increase total rents to their current/2020 levels by 2050[18]. This new rent level would support refinancing of the same bond value with a total yield up to 2.5% (i.e. around 3 times the current rate). There is no way of telling what rate would be required in 30 years’ time, but this represents a low risk, with significant room for interest rate growth and multiple options to help mitigate future financial challenges, including increased property value and increased rental yield.
Who benefits?
Much of the focus so far has been on the benefits of this scheme to current tenants, in the form of reduced rents, reduced household bills, greater security of tenure and a more comfortable/warmer home.
But there are others who will reap significant benefits, namely:
● Current Buy-to-Let landlords who wish to exit the market. They will be provided with a simple, quick way to sell their homes at current market rates and realise any capital gain accrued so far.
● The broader housing market. This scheme could also help create a price floor under the BTL housing market and thus prevent any future house price crash as seen in 2009 and the early 1990s. This ‘floor’ would be set by the level of base rent established and the current bond/loan interest rate (see example below), and could be put into effect by local authorities or social housing bodies who could act as buyer of last resort if BTL landlords were unable to sell their properties elsewhere.
■ Example: Annual base rent[19] x (100/interest rate) — (cost of retrofit) = House price floor
● That’s: £3460 x (100/1.36) –(£25k) = £230k
● Taxpayers. Not only could they benefit from the interest payments made on any Bank of England bond purchases, but the reduction in rents would also allow for a reduction in the cost of providing housing benefit to private renters. The government currently pays over £12bn each year to private tenants[20] to help with meeting housing costs. If those costs are substantially reduced (in this model by 35%+), that provides the opportunity to save at least £4bn in housing benefit payments.
○ It is also likely that the overall funding in this proposal would also result in an increase in tax revenues — as a result of increased employment, capital gains from purchases of the PRS homes, and increased domestic consumption created by higher household disposable incomes.
● The environment. The UK’s housing stock is one of its main sources of greenhouse gas emissions and the PRS has proven the most difficult part of that sector in which to reduce those emissions. This proposal will allow for a comprehensive upgrade of some of the UK’s poorest housing stock and will help the UK meet its Paris Climate Agreement targets.
● Communities. With greater security of tenure, communities will see residents commit more to their local area, and for longer, while the increased household disposable income of those tenants will bring a welcome boost to community economies
● The nations and regions of the UK. Because this proposal applies equally to all areas of the UK, no region, town, city or village will be left out. The £138bn retrofitting programme will be spent in every community across the country. If we assume the BuyBack project runs over 5 years, that equates to £27.6bn of spending (or £411 for each UK inhabitant) every year. So, a town like Burnley in the North West, for example, could see an extra £36m of spending for each of those years. In addition, the reduction in rents, once it is established, could see an increase in household disposable incomes in the town of up to £56m (assuming all PRS properties were subject to BuyBack and deep retrofitting).
● Manual workers. The £138bn retrofitting programme would allow for the training and employment of up to 500,000 skilled manual workers across the whole of the UK for this period. This is the group that will otherwise find it most difficult in the post-COVID economy to acquire purposeful work in their local area that provides adequate pay and transferable skills.
● Small businesses. They could bid for small, local contracts to complete the retrofitting work to an agreed standard. Currently, the UK does not have the capacity to complete this volume of work in the necessary time-frame and its dynamic and innovative small business sector could help create and mobilise this capacity.
● The NHS. Warmer, better quality homes will result in a healthier, happier population. Poorly insulated homes are costing the NHS at least £1.5bn per year[21], while the respiratory and mental illness they cause are a major factor in workplace absenteeism. Better homes mean a healthier population and a more robust economy.
● The ‘Zero Carbon Sector’. This level of investment will help drive innovation in the energy, housing, finance and environmental sectors, as it has done in other countries such as the Netherlands[22], allowing the UK to become a world leader in combating climate change and improving housing.
Conclusion
This BuyBack and Retrofit proposal will transform the housing sector for the better, improve household and government finances, reduce our Carbon emissions (thus helping us meet our international obligations), re-invigorate our post-COVID economy, improve the health of millions of people, create more stable and engaged communities, fund a massive skills and training programme, drive multi-sector innovation and help level-up the nations, regions and communities across the UK.
It is the project we need to fuel our economic recovery in a way that benefits everyone and builds a stronger economy, society and environment.
A combination of central government, local authorities, private investors, small businesses, charities & community housing bodies and skilled manual workers can come together to boost our economy in a way that delivers on our Climate Change commitments. But it can only happen with the leadership of government to help raise the necessary finance and engage all the key stakeholders. This is a clear opportunity that will provide a substantial win for us all.
[1] https://www.simplybusiness.co.uk/knowledge/articles/2019/12/landlords-leave-buy-to-let-market-selling-100k-properties/
[2] Government is now paying interest as low as 1.25% on 30-year bonds (https://www.dmo.gov.uk/media/16528/pr070520b.pdf), and even Housing Association bond yields have fallen from an average of around 4% to approx 2.2% now- https://omghcontent.affino.com/AcuCustom/Sitename/DAM/136/MARKET_DIGEST_-_MARCH_2020.pdf
[3] https://www.ons.gov.uk/economy/inflationandpriceindices/articles/ukprivaterentedsector/2018
[4] https://www.ons.gov.uk/economy/inflationandpriceindices/articles/ukprivaterentedsector/2018#characteristics-and-quality-of-dwellings
[5] https://www.ons.gov.uk/economy/inflationandpriceindices/articles/ukprivaterentedsector/2018#characteristics-and-quality-of-dwellings
[6] https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/families/bulletins/familiesandhouseholds/2018
[7] https://www.statista.com/statistics/752203/average-cost-of-rent-by-region-uk/
[8] https://landregistry.data.gov.uk/app/ukhpi
[9] https://www.gov.uk/government/publications/domestic-cost-assumptions-what-does-it-cost-to-retrofit-homes
[10] https://www.insidehousing.co.uk/news/news/housing-association-says-zero-carbon-will-cost-20000-per-home-66885
[11] https://www.gov.uk/government/collections/household-energy-efficiency-national-statistics
[12] https://www.marketwatch.com/investing/bond/tmbmkgb-30y?countrycode=bx
[13] This figure will fluctuate, but seems to be a reasonable estimate of local the costs usually incurred by local authority housing departments per property
[14] https://www.moneyadviceservice.org.uk/blog/how-much-is-the-average-gas-and-electricity-bill-per-month
[15] https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
[16] https://clhtoolkit.org/finance/local-authority-lending-prudential-borrowing
[17] https://www.housingtoday.co.uk/news/chancellor-announces-50m-social-housing-retrofit-programme/5106864.article
[18] This assumes that the maintenance/servicing costs increase by the same amount per year (i.e. 2%)
[19] this base rent level has been set at the lowest feasible point that current borrowing rates would permit, but it could be set differently if required
[20] https://www.gov.uk/government/statistics/housing-benefit-caseload-statistics
[21] https://www.theguardian.com/society/2015/mar/19/cold-homes-causing-more-respiratory-illness-in-england-than-sweden
