Theresa May’s first speech as Prime Minister included a promise to empower ‘working class’ families. It was encouraging to hear her touch on how housing costs are a weight on households’ quality of life but this was reduced to a ‘worry about paying the mortgage’. Research from the Resolution Foundation confirms that it is in fact renters that have seen their incomes squeezed by housing costs the most. The new government now has an opportunity to offer genuine solutions to those for whom home ownership is currently far out of reach.
The analysis shows that the rise in housing costs as a proportion of household income since 1995 has been substantial, equivalent to a household losing £1400 a year – or a 9p rise in basic rate income tax. It also shows that Theresa May is absolutely right that this is a particular issue for working class families. Housing cost to income ratios have increased rapidly for households with below median income, including those deriving less than a fifth of their income from means-tested benefits.
Crucially though, it is not just income band (or class) that matters but tenure – the burden of costs for renting households is consistently higher, with on average nearly 30% of private renters’ household income spent on housing compared to around 24% for those who own with a mortgage.
The balance of affordability by tenure has also changed dramatically since the millennium. In the early 2000s, although there was dramatic increase in private renting, Resolution Foundation research suggests the large increase in the cost to income ration can’t solely be explained by the increasing proportion of people in this more expensive tenure. Overall, soaring rents compared to incomes accounted for the lion’s share of this growth, although house price to income ratios and increasing interest rates put pressure on affordability for mortgaged owner occupiers too.
Post-Financial Crisis, the slashing of interest rates meant the average cost to income ratio fell sharply for mortgaged owner occupiers but continued to rise for renters. Recently this pattern has continued, with social renting also contributing to worsening affordability for the first time in a decade. In addition, for the first time the increase in the number of renters is just as important as the increase in the cost of renting.
The research also shows that super low interest rates and lack of housing supply across the country mean that the growing disparity between renters and those who already own is not just confined to the south. Only in Yorkshire and the North East do private renters spend less than mortgaged owner occupiers.
This evidently damages renters’ ability to save for a deposit, with previous Shelter research suggesting only 12% of renting families are able to do so after paying rent and essential costs. The shift from owning to private renting has been concentrated amongst under 40s, meaning younger households are disproportionately hit. A recent Shelter and YouGov survey found 60% of adults aged 18-44 are putting off key life milestones such as getting married or having children due to housing.
Additionally, another Resolution Foundation report released this week points out that the high rents paid by young households represents a large intergenerational transfer. On average, not only will millennials have spent £44,000 more on rent in their 20s than baby boomers did but half of all this rent – £4 billion a year – goes to this older generation.
Whilst the report is also quick to point out that parents and grandparents do help out their younger family members, rapid increases in house prices have driven a situation where the richest 20% of households are 117 times wealthier than the poorest 20%. Moreover, if only the children of the already wealthy can gain access to housing and the rest of their generation ends up paying high rents to those same wealthy parents, this would lead to an entrenchment of inequality over time.
Fortunately, the new government has options that could help to address affordability for struggling renters. For example, the National Housing Federation has proposed to use some of the money already ear-marked for Starter Homes to build affordable homes for rent, supporting a house building sector shaken by Brexit in the process.
The Joseph Rowntree Foundation have also stressed the importance of genuinely affordable rented housing to reducing poverty and supported Shelter’s proposal for stable long term tenancies with low, predictable rent increases. In addition, they highlight opportunities to improve current devolution deals to support local land assembly and flexibility over funding, such as Leeds City Region’s use of Local Growth Fund money to top up HCA grant to deliver developments with lower rents.
The new Prime Minister’s focus on the millions of struggling households is welcome and in order to make a real change to their circumstances, she must seize the opportunity to provide decent, stable and affordable rented housing.