Meeting the Housing Challenge: The Role of the

Private Rented Sector

Economic and Social Context

17th August 2011

Historic and recent trends

Historic decline in PRS has started to reverse in past 2 decades

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1918 1939 1953 1961 1971 1981 1991 2001 2009

PRS Owner Social

England & Wales Scotland

Sources: DCLG, Scottish Government

Households under 35 increasingly in PRS

Tenure split for households with head of household under 35

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

PRS Owner Social Source: Scottish Household Survey

BTL fuelled growth in PRS, but hit by credit crunch

Buy-to-Let Gross Advances for House Purchases in the UK

0

1

2

3

4

5

6

7

Q4 20

06

Q1 20

07

Q2 20

07

Q3 20

07

Q4 20

07

Q1 20

08

Q2 20

08

Q3 20

08

Q4 20

08

Q1 20

09

Q2 20

09

Q3 20

09

Q4 20

09

Q1 20

10

Q2 20

10

Q3 20

10

Q4 20

10

Q1 20

11

£bn

Source: CML

Half of PRS tenants move within 2 years – need for longer tenancies?

Years lived at current address

0%

10%

20%

30%

40%

50%

60%

0 - 1 1 - 2 2 - 3 3 - 5 5 - 10 10+

PRS Owner Social Source: Scottish Household Survey

Prospects for Sector

(Real) house prices gradually unwinding, limiting capital growth

Average house prices

£0

£30,000

£60,000

£90,000

£120,000

£150,000

£180,000

£210,000

1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Scotland nominal Scotland real (2010 prices) UK real (2010 prices)

Sources: Nationwide (House prices); ONS (RPI)

Housing Benefit reforms may pressure parts of PRS

• 470,000 HB claimant households in Scotland (July 2010) – 86,000 (18%) in PRS

• Estimated impact of reforms:– Capping LHA weekly rates at £250 (1 bed), £290 (2 bed), £340

(3 bed), £400 (4 bed), no 5 bed rate– Setting LHA to 30th percentile– Removal of £15 excess

In total will affect almost 55,000 households who will lose an average of £10 per week.

• Further reforms– Uprating by CPI rather than market rents– Extend shared room rate to 35 years – around 7,500 affected

(mainly Edinburgh and Glasgow)

But FTB deposit barriers likely to keep PRS demand high

Affordability measures for first-time buyers in Scotland

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Deposit as % of income

Interest payments as % of income

Source: CML

• Despite lower expected capital growth & Housing Benefit changes, rental yields potentially attractive compared to other investments– 10-year UK government bonds: 2.5%– FTSE 100: 1.0% over 1-year period– Rental yield: 6.6% (Glasgow postcode G31; source

FT Money)

Meaning rental yields relatively attractive

Challenges

Lower satisfaction than in owner sector, especially where children

Satisfaction for households with and without children

0%

10%

20%

30%

40%

50%

60%

70%

no children children no children children no children children

Owner-occupier Private rent Social rent

Very satisfied Fairly satisfied Neither satisfied nor dissatisfied Fairly dissatisfied Very dissatisfied

Source: Scottish Household Survey

Significant energy-efficiency improvements required

Energy efficiency - Banded NHER scores by tenure (2009)

-

10

20

30

40

50

60

70

80

PRS Owner Social

%

Poor (0-2) Moderate (3-6) Good (7-10) Source: Scottish Household Condition Survey

Final point: Scotland’s PRS still has room to expand!

Relating housing tenure shares - selected countries

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Hungary

Scotland

Netherlands

England

Ireland

Denmark

Austria

France

Sweden

Germany

PRS Owner Social