Three-fifths of private renters cannot afford the cost of living, and high rents are a key reason why. It’s time to fix our broken housing model and make our homes more affordable.
The cost of living crisis means that, for many families, affording the essentials — such as the rent or mortgage — is getting harder. While the headline inflation rate appears to have peaked, nearly everyone is being hit with huge rises to their housing costs. Social tenants face rent increases of 7% next year and 3m mortgaged households will see an average annual increase of £3,000 by the end of 2023/24. Private rents are expected to increase by 6.5% in 2023, on the back of a 12% increase in rents for new lets over the 12 months prior to October 2022.
Put all that together and just 8% of properties are affordable for people in receipt of housing support. With section 21 ‘no fault’ evictions still legal, it is no wonder that 300,000 families could be homeless by next Christmas, up by 32% since 2020.
Private renters have been hit particularly hard over recent years, with rents forecast to rise by 10.0% between April 2020 and April 2023. Had pre-pandemic trends continued, rents would have only risen by 4.9%, increasing the disposable income of private renters in the lowest income quintile by 3.2% (£330 per year). Under this scenario, 70,000 more households would be able to afford a decent standard of living.
Figure 1: Low-income households would be 3.2% better off had rent increases remained at their pre-pandemic average
Rising housing costs are just one, albeit significant factor driving down living standards. In April 2022, as inflation was approaching double digits, 9.7m households (34%) were unable to afford a decent standard of living, as measured by the minimum income standard. Even once social security has been uprated next month, and accounting for the cost of living payments, the number of households unable to afford a decent standard of living will have increased to 11.1m (39%). This includes 50% of households with children and 85% of lone parents. Around 70% of households in the social rented sector will have incomes below the minimum income standard by April 2023, as will 58% of private rented sector households. 26% of owner occupiers with mortgages will also be unable to meet their costs, which is 7% more than last April, the greatest increase among any tenure group.
Families already going without a decent standard of living are also being plunged further into financial hardship. By this April, these households will on average be £650 per month short of meeting the minimum income standard, an increase of £70 per month compared to the same time last year. For households with children, the average gap is £870 per month, up from £780. This crisis, which follows a decade of stagnant wages and cuts to social security, is forcing record breaking numbers of families to turn to food banks for support.
The inadequacy of the welfare safety net must be urgently addressed. That’s why NEF is proposing a bold, new approach to social security. By combining a universal element with a means-tested system, the national living income would support every household if their income falls, providing faster support and a more generous safety net. By aligning work and personal allowances, no person would pay tax or have benefits withdrawn until they reached a decent standard of living. Reforming the social security system to raise incomes is a vital step to tackling poverty and the cost of living crisis.
However, to ensure families can afford a decent standard of living, reducing basic costs, including housing, is crucial. In England in 2021/22, social tenants and owner occupiers with mortgages spent 27% and 22% of their household income on their rent respectively. But it is private renters who have consistently faced the highest housing costs, reaching around one third of their income.
Figure 2: Private renters have consistently faced the highest housing costs as a proportion of household income over recent years
Furthermore, over half (53%) of the poorest private renters spent at least 40% of their income on rent. This ‘housing overburden rate’ — as defined by the OECD — was one of the highest in the OECD and around 3 times that of Germany or France.
Figure 3: The housing overburden rate of private rents in the UK is one of the highest in the OECD
At the heart of the rise in the housing overburden rate in the private rented sector has been a toxic combination of rapidly rising rents and a freeze in housing-related social security payments. The Local Housing Allowance (LHA) — the part of housing support that covers private sector rents — was frozen between April 2016 and April 2020. This drove the housing overburden rate of private renters up by 8 percentage points between 2016 and 2019. Recalibrating the LHA in 2020 eased the burden slightly, but rents have been rising more significantly after 2020.
In our new analysis, we find that unfreezing the LHA at the budget next week would give 1.8 million households an average of £520 more per year, significantly reducing the risk of homelessness for these families at a cost of £1bn per year. The total cost includes a small number of households who would be newly entitled to universal credit as a result of the policy change, also making them eligible for the cost of living payments, worth £900 per household this financial year.
The chancellor must unfreeze the LHA at the budget as a matter of urgency. But in the long term, wholesale reform of our broken housing system is needed. The size of the private rented sector — characterised by high rents and low security of tenure — has more than doubled as a proportion of our total housing stock since the late 1980s, while the overall proportion of social homes has almost halved since the introduction of Right to Buy in 1980. NEF’s analysis shows that we have built just 7% of the social homes we need following reforms introduced in 2018. As a result of this imbalance, 8.5 million households experience housing need — in the form of homelessness, overcrowding, and living in unaffordable, poor quality and unsuitable homes. Of these households, 4.2 million have the most acute needs that would be best addressed through the enhanced affordability and security of tenure that comes with a social tenancy.
Figure 4: Since the introduction of Right to Buy, the proportion of socially rented homes in England has almost halved, and since the early-2000s the proportion of PRS properties has almost doubled
NEF’s Homes for Us Alliance is developing solutions to fix our broken housing model, focusing on how we can upgrade and repurpose private rented sector accommodation as homes for social rent. Doing so would increase the supply of the homes we most desperately need — social homes — while providing landlords wishing to leave the market with an exit strategy. If linked to objectives around upgrading energy inefficient homes, it could also help deliver the warmer, safer homes the government wants for the private rented sector.
Repurposing 800,000 private rented sector properties as social homes would reverse the overall proportions of the private and social housing sectors. It would increase the size of the social rented sector from 16.5% of the housing stock to 19.6%, and decrease the size of the private rented sector by approximately the same amount. For the median household no longer renting privately but now renting a social home, income after housing costs would increase by £450 per year. They would also benefit from the stability that comes through security of tenure.
As well as saving on rent, most private renters would enjoy reduced energy bills if they rented from a social landlord, due to the higher energy efficient requirements in such properties. 2.4m privately rented homes, over half the total amount, do not meet energy efficiency standard rating ‘C’ – which the government says it wants all properties to meet. 990,000 (22.9%) do not meet the Decent Homes Standard, which ministers say they want to expand to the private rented sector. Tenants in EPC ‘E’ properties — the current minimum standard in the private rented sector — would save an average of £850 if their property was upgraded to meet these enhanced minimum standards.
Upgrading and repurposing these homes would require upfront investment, but it would significantly reduce the annual housing support bill (the combination of housing benefit and the housing element of universal credit) by £1bn per year. The UK is forecast to spend £29bn this year on housing support. In 2020 1.4% of GDP was spent on this, compared to the OECD average of just 0.3%. NEF analysis has shown that the government is set to spend five times as much subsidising private rents through housing support than it will on affordable homes grants over the next four years. Investing in rebalancing our housing stock would reduce housing support costs, address housing need and homelessness, and lower the £1.6bn spent annually by local authorities on temporary accommodation.
The chancellor must unfreeze the LHA in his budget to prevent pushing more families below the minimum income standard and driving thousands more into homelessness. In the long run,investing in social landlords’ ability to upgrade, acquire and repurpose private rented accommodation to create a new generation of social homes provides a clear path out of the housing and cost of living crisis.