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The way to deal with the rental crisis? It’s not capping prices | Vidhya Alakeson

Lack of supply is the root of the problem renters face. Why don’t pension funds and life insurance companies invest in new stock?

A simple set of trade-offs used to apply in housing: if you rented, you had less security and had to put up with someone else’s furniture, but it was cheaper than buying; if you were a homeowner, you had a place to call your own but it cost you more for the privilege. A new report from the Halifax confirms that this situation has now turned on its head. In almost all parts of the country, the average mortgage holder is paying less each month than the average tenant.

At one level, this situation is an artefact of today’s unusual mortgage market. Interest rates are at an all time low but they will not stay down forever. When they eventually rise, monthly payments will start to climb and will once again overtake rents. When this happens, families who stretched themselves to get on the housing ladder will find themselves in a precarious financial position. The Resolution Foundation’s Essential Guide to Squeezed Britain shows that even with rates as low as they are, mortgage payments still consume more than 25% of the monthly incomes of more than a quarter of low- to middle-income families.

But high rents are also a symptom of a wider problem in Britain’s housing market. In 1991, it would have taken a couple on a low to middle income around four years to save for a deposit on their first home. By 2011 that figure had rocketed to 22 years. This is because house prices remain historically high despite the recession and, following the credit crunch, 100% mortgages have disappeared from the market. In 2006-07, 20% of first-time buyers on a low to middle income bought with 100% mortgage. By 2009-10, no one in the group could get one. With access to the housing ladder blocked for young people who cannot rely on the bank of mum and dad, the numbers stuck renting privately have grown, causing rents to rise.

What seems particularly unfair is that ever-increasing rents are not buying tenants anything more than before. Their landlord can still ask them to leave at short notice. They are rarely allowed to decorate and make the place feel like a home, and when they move out, they have nothing to show for all the money they have paid in. What is more, for those who are dependent on housing benefit, rising rents will push them ever closer to the proposed benefits cap, forcing many families to move.

Rent control is sometimes proposed as a solution to the current set of problems for both families and government. Stop rents rising so quickly and the problems disappear. Except that they don’t. The real problem in the housing market is a lack of supply. Far from helping, rent controls are more likely to hinder the growth of supply. Pension funds and life insurance companies could bring millions, if not billions, of investment into high-quality, purpose-built rental accommodation. It would meet the needs of ordinary families, filling the hole left by dramatic cuts to public sector investment. But investors will turn their backs on housing if rent controls are imposed. They will not be able to make a viable return on their investment if rents fall out of line with inflation because they are capped.

A bigger role for private investors in fixing Britain’s rental crisis does not let government off the hook. Private investment will need to be matched by greater use of publicly owned land to get rental schemes off the ground. Greater flexibility in planning will also be essential. While the government’s recent housing strategy did recognise renting, it had very little to say to address the supply problem. If the postwar trend in home ownership has now gone into reverse, future strategies must not repeat the same mistake.

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