Making the Private Rented Sector Work for People in Poverty

The following write up is from a summer 2017 event held by social policy research and development charity the Joseph Rowntree Foundation (JRF) – principally exploring how the private rented sector can work better for lower income groups and those in poverty. Timely in nature in terms of its proximity to the Grenfell Tower disaster, Campbell Robb, chief executive of the organisation, started the event by reasoning how the social / affordable housing crisis continues to elicit opinions from all sides. However, the broad consensus remains that both policy making and market dynamics are not keeping up with the changes necessary to improve the current landscape.

After some real-life quotes from tenants across the country, Robb went on to describe the Private Rented Sector (PRS) as the “home of poverty” – with current estimations pointing to 4.7 million people living in poor living conditions. The JRF also estimates that 70% of private renters in the poorest fifth of households spend at least 1/3 of their income on housing. The objective of the event was therefore to objectively examine the “causes and consequences” of the UK´s worsening housing crisis and, in turn, explore how the PRS has a role to play in surmounting the core challenges.

Although I must confess to expecting the event to be a collective “landlord bashing” session, I was pleasantly surprised at the level of objective reasoning and appreciation of all sides of the arguments. Indeed, the voices of professional landlords and social lettings agency managers were regularly heard throughout the day. Highlighted below are some of the presentations, that were excellently interspersed with audience participation and feedback.

Examining the Private Rented Sector – A Housing and Life Experiences Study

Karen Croucher from the Centre for Housing Policy at the University of York reported on a collaborative study entitled “Housing and Life Experiences: First interviews with a qualitative longitudinal panel of low income households” which surveyed 72 participants of various age groups across the UK. The ongoing survey uses a mix of face-to-face and telephone interviews spread over 9-12 months (with more research to be released towards the end of 2017). Some of the key comments made during the presentation and findings from the report (specifically related to the Private Rented Sector) are highlighted below:

Relative to social housing, whilst broadly deemed as better in terms of condition, the PRS was largely perceived as expensive and insecure by the survey participants (even by those who appear settled in their PRS homes for a prolonged period);
The PRS was, however, generally seen as more accessible relative to other tenures – in so much as there are usually no waiting lists and front-loaded payments are comparatively low;
For those who were working (and not in receipt of housing benefit), rent and associated housing costs were a significant drain on income. Unless there was the prospect of a significant increase in wages or some other windfall, participants feared that they have been locked into “just managing” for the long term;
Young currently low-income households on educational and career trajectories with ambitions for homeownership contrasted with participants who had spent a long time on low-incomes and worried that their future moves would be determined by landlords rather than themselves;
Poor locations / neighbourhoods had a broader impact on people’s financial situation in terms of accessing and maintaining work; being close to family / social networks for support as well as essential services such as child-care. Such environments also have more of a detrimental effect on health;
A number of single parents and young couples with children had moved quite extensively within the PRS, finding it difficult to access both reasonable and affordable accommodation in decent locations;
Concerns were also expressed with regards to the limited amount of properties for the disabled and those with long-term health problems. Long-term disability increases the risk of living in poverty and often leads to a change in people’s working arrangements and income levels (usually a reduction). Where housing costs are high, reductions in income because of ill-health or the onset of disability can force people to move against their will. Some the participants were using Disability Living Allowance (DLA) or Personal Independence Payments (PIPs) to top up their housing benefit;
Landlords are increasingly reluctant to house non-resident children and pets;
Regular and often substantial rent increases in the PRS were a problem for many low-income households. This eventually prices some out of their homes;
Living in the PRS on a short-term tenancy agreement, particularly in areas of high demand, created ongoing uncertainty and anxiety for some of the participants. Questions constantly being asked include whether tenancy agreements would be renewed; the rent would go up; they would be able to afford any rent increase and whether they would be able to find another property that they could afford if forced to move out;
Participants expressed concerns over the costs of moving – particularly in relation to the deposit for a new property. Albeit an extreme example, one participant reported she had paid between £6,000 and £7,000 (which included six months’ rent in advance) when first moving into a studio flat. She believed that such an onerous figure was intended to discourage people on low incomes or benefits to apply;
The report stated that younger adults are also much more likely to rent than buy their own property than earlier generations (only 30% of 25 to 29-year olds are buying now, compared to 55% in 1996). At the same time, more of these groups are struggling financially in the PRS. Some return to parents, helping to reduce or mitigate housing costs. Although participants took such steps out of necessity, overcrowding was subsequently reported to be a problem. However, some commented on the positives of living back together as an extended family;
Beyond regular rental payments, participants spoke about other housing costs including regular bills for fuel, council tax and water rates. Some stressed how the poor condition of their properties increases their fuel bills. Particularly amongst those using pre-pay cards, participants explained how that they have ended up on high-cost tariffs. Many reported that they had at best to “be careful”, for example by only heating one room, and at worst were cold during the winter months. Being cold was preferable to running up a large fuel bill;
The challenges of making a “home” and “keeping a place nice” or “comfortable” on a low income were also reported. However, some commented that they appreciated the benefits of not having to pay for furniture, white goods and carpets whilst also having no responsibility for maintenance or repairs;
For the participants in receipt of housing and/or other benefits, the main concern was that their benefits were accurately calculated and paid without interruption. Delays in assessing claims, reductions in benefits or over-payments that had then been reclaimed or deducted from ongoing payments had caused considerable hardship to a number of participants;
Some landlords were reported to be very good at responding to requests for repairs. However, participants mentioned they were often reluctant to push the landlord for small repairs or maintenance (even though they have the legal right to do so) as they did not want to be perceived as troublesome tenants, “rock the boat” or give cause for a rent increase. One participant described the experience of letting as needing to be “on your toes all the time”. There is also an increasing concern of landlords going bankrupt;
Others gave praise to their landlords, describing how support during the tenancy has made the difference whilst helping them cope financially and emotionally at times of difficulty. Examples of commendable actions include helping to find other properties, financial assistance, not increasing rents and forbearing arrears.

A final report will be available in late 2017 that will be published alongside a suite of policy solutions commissioned by the Joseph Rowntree Foundation.

Putting the Private Rented Sector into Perspective

Kate Faulkner (@katefaulkner), one of the UK’s leading buy-to-let spokespeople, gave some interesting perspectives from the landlords’ side of the fence. Summarised below, Faulkner started by highlighting some PRS “myths”:

Contrary to widely held belief, rents are not “sky rocketing” or “soaring”;
Although more robust data is required, buy-to-let rarely generates solid income for many years and is increasingly used as a pension provision substitute;
Most landlords typically own 1 property and rental receipts form a relatively minor part of their net income;
Landlords in 2017 are business owners, nurses, doctors, armed forces, graphic designers, amongst others;
Up to 30% of landlords are “accidental”;
Most landlords are over the age of 55;
According to Rightmove, 15% of landlords are tenants themselves;
The actual number of rogue landlords is tiny and it is the few “bad apples” that are tarnishing the industry.

Providing a quote by John Paul – managing director at the award-winning lettings agency Castledene – on how this company provides decent quality housing to recipients of Local Housing Allowance (LHA) with very few complaints, Faulkner stressed the unfair nature of continued vilification of landlords who are not monsters and increasingly feel like they are treated as second rate.

In relation to an ongoing debate on rental increases, Faulkner further highlighted some research compiled by Hometrack (reproduced below):

The data demonstrated that, with the exception of London and the much of the South East, there have only been marginal increases in rents – particularly when considering inflation totalled 27% between 2007 and 2016. Landlords, she argued, rarely want to increase rents as such action can deter long-term tenants. Furthermore, in response to complaints that paying rent is “dead money” (i.e. entirely used to pay down landlord’s mortgages and fund their retirement), she outlined how it is often forgotten that a sizeable proportion is paid in interest (despite the fact that landlords ultimately benefit from capital appreciation).

Faulkner went on to describe how buying buy-to-let in much of the South has long been unfeasible. Using the city of Oxford as an example (where, according to the most recent Hometrack report, prices have risen by 2.1% in the last 12 months): when factoring mortgage, non-finance costs and tax, there is a relatively negligible level of net income. With yields being so low, unless there is a significant amount of unreleased equity in the property, profits are quite easily wiped out when a new boiler or other big-ticket expense is required.

She also underlined how earnest questions need to be put to mortgage lenders and insurance providers with regards to their resistance to financing buy-to-let properties in receipt of Local Housing Allowance (LHA). Both Faulkner and other speakers during the day called for the LHA freeze to be lifted or at least to be uprated against the Consumer Price Index (CPI). The continuation of the cap will likely translate in compromised quality standards within the PRS and there is a growing reluctance amongst landlords to let to these tenant groups, particularly when the wider taxation and regulatory constraints are considered. Other concerns that need to be firmly relayed to policy makers include dealing with lack of guarantor that will pass the appropriate requirements required for landlords to be comfortable with taking on low-income / housing benefit tenants. There have also been concerns by landlords who are housing people “yo-yoing” between low paid jobs and housing benefits, which is often resulting in arrears.

She stressed the need for collaborative efforts between landlords and local governments in dealing with issues related to the system. For example, local authority insistence on evicting LHA tenants via the courts merely reinforces many landlords reluctance to operate in this space. Indeed, there is a notable proportion of landlords who want to help house low income groups but cannot as it puts the investment, and therefore their livelihoods, at risk.

Property Markets and the Local Housing Allowance (LHA)

Abigail Davis (@AbiDaviesHsg), associate director at Savills, based her presentation on the real estate provider´s detailed research into the rental market.

Although UK market rents had increased by 1.9% between 2000 and 2016, Davis indicated that household income had simultaneously risen by 2.4% during the same period, as did consumer prices by 2.1%. However, as seen in the chart below, there have been huge variations – with growth in London notably surpassing the rest of the country.

Despite there being better news on the National Living Wage (projected to rise to at least £9 per hour by April 2020), the fact that Local Housing Allowance levels will be frozen at 2015-16 levels until 2019-20 is likely to continue to have a negative cumulative impact (see Savills policy response here). The inevitable shortfalls will ultimately require people receiving housing benefits to top-up which they may well struggle to do. The series of slides below show the further divergence between shared accommodation and 1, 2 and 3-bedroom properties – essentially highlighting the reduction of the financially accessible pool of properties for households claiming benefits:

What Makes a Successful Lettings Agent?

One of three break-out sessions saw a number of lettings agents operating exclusively in the Local Housing Allowance (LHA) space discuss their operational experiences alongside the challenges of developing their business models.

Susan Aktemel from Homes for Good (a Community Interest Company based in Glasgow), for example, explained how the core objective of the agency is to provide a service that works fairly for both landlords and tenants. Underlining how the widening disparity between private and LHA rents is not only a “southern issue”, every let needs to be looked at on a case-by-case basis. The agency charges flat fees and there is a degree of flexibility on deposits. Working directly with the council, Homes for Good collaborates with the tenants to spread the costs of initial deposit requirements (thereby alleviating some of the associated pressures). This type of service is directed towards building relationships with their tenant-customers – engaging with them to understand what they need whilst ensuring that all aspects of tenancy management are run efficiently (as opposed to adopting a “set and forget” strategy).

Aktemel went on to criticise the lack of grant funding to pick up any of the slack from these extra offerings. Underwriting the risk of LHA models is completely different to social housing. For example, many landlords enter the sector accidentally and are “one-man bands” that cannot afford to lose 1 or 2 months’ rent. Housing associations, on the other hand, usually have void contingencies built in. This, Aktemel argued, would further explain why many landlords remain apprehensive about taking on LHA tenants. On a positive note, she highlighted how the agency has recently raised some £8 million to invest in creating decent quality and affordable rented homes for low income groups.

Carla Keegans from The Ethical Lettings Agency (also operating as a Community Interest Company) in the North East of England also gave the audience some insights of her two years of running a social lettings business. Citing an example of shared room LHA rates being as low as £57 a week in Teeside, achieving a healthy yield can be a challenge for landlords in these areas. Over 60% of all tenants living in the agency’s managed properties are in receipt of LHA (the majority of whom are indirectly excluded by other agencies). A third of all properties are let to people who have been homeless or at risk of being in such a situation.

Similar to Homes for Good, the organisation operates on a set fee basis with the aim of being simple, transparent, affordable and fair. Whilst the lettings process is non-judgmental with no “blatant exclusions”, the organisation engages in detailed rent affordability assessments with monies negotiated up-front. Also offering ongoing tenancy support, the agency has strong ties with specialist organisations and, where required, liaises with the benefit authorities. As a result, 80% of the people living in the managed properties have sustained their tenancy and Keegans has had to deal with just 3 eviction processes since setting up the business. Landlords benefit from having access to a professional housing practice with guaranteed services in place. The agency has achieved the position of being a genuine social investment opportunity and standards are improving. Nonetheless, some of the main challenges and issues Keegans highlighted include:

The highly competitive and “cut throat” nature of the local lettings industry;
The difficulty of “trying to change an industry that doesn´t want to change”;
The direct investment for 2-3 years before seeing a return (a lot of time and patience is required for a social lettings agency to be financially viable). Keegans has personally invested in the business for 2 years and much is still dependent on her;
Building a sustainable LHA lettings business requires thorough market research and a robust, flexible business plan;
Landlords are always looking for the best deal possible (focusing too much on the short-term rather than tenancy longevity);
Lettings agents are frequently looking for a churn of new tenants to maximise their revenues;
Building up a supply of affordable rented properties takes time;
There is also a need to have experienced staffing who are committed to changing things for tenants and sympathetic to their issues.

It is also worth highlighting some of the comments made by Chris Hancock, head of housing at Crisis (who we previously interviewed for this blog). The homelessness charity is actively working with lettings agencies such Homes for Good and The Ethical Lettings Agency to drive forward the growth of decent quality provision for low income and vulnerable social groups.

Hancock cited other organisations working actively in the space including Home Turf Lettings in Bath, CABWHABAC in Worcester, Carmarthenshire Council (that is running its own social lettings agency), Elmbridge RentStart, BondBoard in Rochdale, Arch in North Staffordshire and NOMAD in Sheffield. Crisis’ own Guide to Social Lettings Agencies also has some useful guidance.

Highlighting some good practice examples such as lower rent in return for refurbishment cost subsidies, Hancock underlined that whilst financial viability and generating revenue is key, an effective social lettings agency should have broader aims than just financial and numerical success. Despite the diminishing number of landlords, particularly those willing to let to LHA tenants, evidence is showing that social lettings agencies are not charging as much (relative to most high street firms) and are interested in long-term lets. This means that there is an opportunity and a unique offer compared to commercial agents. However, he believes that much will depend on effective policy change such as reversing the LHA freeze and revising the rules governing the Shared Accommodation Rate (SAR) for the under-35s.

In terms of moving forward, Hancock appreciated that there will be no overnight success story and much will depend on solid market research, getting back-office operations right, a clearer understanding of the costs of service delivery, proper action plans, support structures and a collaborative effort amongst social lettings agencies (through a central point of contact) to learn from both good and bad experiences. Welcoming the end of tenancy fees, Hancock also called for more cross-authority and cross-sector working, subsidies alongside a concerted effort to push forward ongoing homelessness initiatives such as Home No Less Will Do and Housing First as well as the campaign for a National Bond Scheme whereby governments would underwrite low income earners deposits (sign the petition here).

Making the PRS Work for People in Poverty – The Government´s Approach

Jane Everton, Deputy Director at the “Better Rented and Leasehold Sector” at the Department for Communities and Local Government (DCLG) spoke on the government´s efforts to increase housing supply, particularly in response to the Grenfell Tower fire.

The Department has published an explanatory note on the building safety programme that has been set up and is now underway. Ministers have remained sighted on wider policy issues and officials are working with them to establish priorities. Later in the presentation, however, she admitted that “Brexit related measures” are likely be prioritised in the next Parliamentary session. Nonetheless, it is worth highlighting some of the key points:

Doubling in size since 2002, Everton highlighted how the Private Rented Sector (PRS) is now the second largest tenure in England – housing 4.5 million (20%) of all households. People are now living in rented accommodation for much longer. According to YouGov data, Most PRS landlords are ‘amateur’ – with only 1% landlords owning more than 10 properties. Most (89%) are private individuals with 1-2 properties;
The sector continues to be important for students and young professionals, but is increasingly housing others too. For example, more families, vulnerable and older people are being housed by private landlords (some of whom would previously have been in social housing). However, many are made up of households who aspire to – but are struggling to access – homeownership as well as those on lower incomes;
Expressing some concerns that lower income households can struggle to maintain a tenancy, the termination of assured shorthold tenancies is now leading cause of statutory homelessness. However, in 2015, a fifth of dwellings (19% or 4.6 million homes) failed to meet the Decent Homes Standard, a reduction of 3.1 million homes since 2006 when 35% of homes failed to meet the requirements. At the same time, the private rented sector had the highest proportion of non-decent homes (28%) while the social rented sector had the lowest (13%). However, standards in the private rented sector are improving. The proportion of tenants in the private rented sector living in non-decent housing fell from 47% in 2006 to 28% in 2014;
In terms of policy response, the government has been working to increase the supply of rented properties. There are several initiatives aimed at tackling this issue including: a £10 billion debt guarantee scheme to support the delivery of new homes purpose built for private rent and over 25,000 additional affordable homes; a £3bn Home Building Fund, £1bn of which is available to provide development finance for homes across a range of tenures. A Build to Rent Fund, for example, provided over £630 million of development finance for the supply of new privately rented homes. The overarching aims are to (a) increase the supply of decent quality, well managed PRS stock; (b) improve affordability that will enable middle income households to save and lower income households to pay; (c) ensure families have the security they need, without damaging investment; and (d) tackle inferior quality homes and driving bad landlords out of business;
On this latter issue, through the Housing and Planning Act 2016, a range of additional powers are aimed at incentivising action against rogue landlords and agents. Since the 6^th April 2017, civil penalties of up to £30,000 are enforceable for a number of housing-related offences in addition to the extension of Rent Repayment Orders to cover illegal eviction, breach of a banning order or failure to comply with a statutory notice. Everton outlined the aim to introduce banning orders for the most serious and prolific offenders as well as a database of rogue landlords and property agents convicted of certain offences. The Bill was amended in the House of Lords to give the Secretary of State powers to ensure property agents (i.e. letting and managing agents) that hold client money, such as rent or service charges, belong to a client money protection scheme and require that rented properties in the PRS meet acceptable electrical safety standards;
Other initiatives already in place include: the Model Tenancy Agreement; work with the Council of Mortgage Lenders (CML) to remove buy to let mortgage restrictions on longer tenancies; protecting tenants from retaliatory eviction and the introduction of mandatory smoke and carbon monoxide alarms. The PRS Affordability and Security Working Group has also brought experts from across the sector including Crisis, Shelter as well as landlord and lettings agency representative groups to look at what more can be done to improve affordability and security in the sector;
Forward work is likely to be heavily impacted by the need to learn lessons from the Grenfell Tower disaster. The Government is considering recommendations from industry experts on whether mandatory electrical safety checks in the private rented sector should be introduced to protect tenants from shocks and fires caused by faults in their homes. The department also plans to build on the outcomes of Policy Lab and the Nationwide Foundation research on the PRS. Announced in the Queen’s Speech on 21 June, it is believed that the ban on letting fees will improve transparency and affordability for renters. Furthermore, a private landlords survey has also been commissioned for 2018.