Making a Rented House a Home

Published today, the Resolution Foundation’s Making a Rented House a Home outlines the shocking fact that the average low to middle income household buying a home today would have taken 31 years to save for a deposit , compared to 8 years in 1983. Last week a report by the estate agents, Savills, revealed that for the first time in Britain’s post-war history, more people are becoming tenants than home owners. We are witnessing a major transformation in our housing market that will see Britain become more like Germany and Switzerland where more than half the population rent rather than own a home. 

This shift in the housing market stems from the fact that it has become harder than ever to raise the money for a deposit to get on the home ownership ladder. Last year, the average first time buyer was able to get a 73 percent loan to value mortgage, according to the Council of Mortgage Lenders. That means finding a deposit or £34,000 yourself given the price of the average first home. Few people can do this alone. The latest estimates are that 90 percent of people depend on the ‘bank of Mum and Dad’ to get on the housing ladder. Those who don’t have help are set to become long-term tenants.

Whatever the reality of getting on the housing ladder, when asked, most people in Britain would still prefer to own than to rent for three main reasons. First, home ownership is perceived to be a better investment. Second, ownership provides more security than renting which generally comes with only a six month contract. And third, you can do what you like to your own house to make it a home. In many rented properties, you can’t make home improvements. You can’t change the colour of the walls. You often can’t even put up your own pictures. 

The second two reasons for preferring ownership could be fixed by adopting a more continental style approach to renting. In the Netherlands, for example, tenants stay in the same property for, on average, 11 to 13 years. Rent increases are fixed so that tenants and landlords know what to expect and tenants are expected to make minor repairs themselves. This kind of renting is supported by investment from institutions such as pension funds whose need for long-term, predictable returns matches tenants’ needs for security. In the UK currently, less than 1 percent of investment in property is in rented housing. Making a Rented House a Home [link] makes the case for a new type of rental product in Britain backed by investment that will better cater to the growing number of long-term tenants. 

Fix those two issues through a new rental product and that just leaves us to the investment benefits of homeownership. Undoubtedly, hedging your old age on the housing market is a gamble. But it’s a gamble that the current tax system encourages. By not charging capital gains tax on owner occupied homes, the current tax system creates a huge bias in favour of homeownership as a form as asset building. Build the same amount of wealth a different way, say through savings, and you’ll pay tax on the interest.  

A capital gains allowance that could be applied to any kind of asset building vehicle would be one way of levelling the playing field between those who own a home and those who will rent for the long term. Instead of removing the preferential treatment of home ownership entirely, we could create an allowance that can be enjoyed by home owners whose properties increase in value as well as by savers whose investment do well. Such an allowance would prevent a growing asset divide between home owners and those who find themselves renting for the long term.