The Mayor of London recently made the headlines when he proposed a "London Living Rent", but what will it mean in practice? We offer a brief analysis of the information available so far.
What is a "London Living Rent"?
In September the Mayor of London, Sadiq Khan, announced early details of a proposal to help address London's housing crisis by introducing a "London Living Rent" (LLR).
Key elements of the proposal (so far) are:
- a new type of tenancy for newly-built affordable homes in the Private Rented Sector (built either by housing associations, councils or private developers);
- a target market of households typically earning between £35,000 and £45,000 p/a, who are currently renting privately; and
- rents capped at one third of median gross household income in the relevant borough, which is expected to yield a drop in the average rent for a two bed flat from approximately £1,500 p/c/m on a market letting to below £1,000 p/c/m on a LLR.
Further details are expected to be released towards the end of the year.
How will it help?
Envisaged benefits of the LLR include:
- creating new homes that are genuinely affordable for stretched lower and middle income earners;
- giving renters financial headroom to save for deposits on future property purchases; and
- preserving existing public housing stock for those in the lowest earnings bracket.
Affordable housing quotas do of course exist within the current planning policy framework for London but, to qualify as affordable, rents need only be 80% (or less) of the local market rate. London market rates are such that 80% of market rate is often still not affordable for lower and middle income earners. A LLR would address this by tying rents to average earnings in the relevant borough, making the affordable element of new developments accessible to a larger group of people.
But what's in it for developers?
It is not just good news for tenants; there is a potential upside for private developers. London's prime residential market arguably has limited growth potential relative to the huge demand for more affordable housing stock; undoubtedly this is an untapped well and delivering a percentage of LLR properties could be a price worth paying to access it.
Developments incorporating a LLR element may also be treated more favourably by planning authorities and committing to provide LLR properties could potentially facilitate access to desirable undeveloped brownfield sites currently under public ownership.
Furthermore, the LLR could increase the attractiveness of developments to potential third party funders; both from the private sector, where responsible capitalism is the order of the day, and from the public sector, where a demonstrable social benefit is a key criterion.
Any investor or developer that is active in the London Private Rented Sector market is also likely to have a vested interest in the overall "health" of London, including its ability to attract and retain the best talent from other places. Improving the affordability of housing through a LLR could mitigate the risk that prohibitive housing costs discourage people with skills in high demand by London employers from living and working in London.
Some notes of caution however.
Historically the Private Rented Sector has expanded in times of deregulation and contracted in times of increased regulation (i.e. rent controls), so there is a risk that a LLR could decrease supply as investors will be concerned about their level of return. In economic terms this would, of course, be counterproductive as the best way to bring rents down, or at least to reduce rent increases in excess of wage inflation, is to increase supply. I
Increasing the affordability of housing within the current pipeline would ease pressure on some lower and middle income earners in the short term but the pipeline itself needs to be expanded to deliver long term sustainable rents. Enforcement of current affordable housing quotas has been somewhat inconsistent and this would also need to improve for a LLR to be really effective.
Moreover, if London property prices continue to rise faster than the rate at which people can save and earn interest then it is hard to see how rent reductions afforded by a LLR could realistically equate to a deposit on a London property purchase.
It is not feasible for the public sector alone to deliver sufficient supply of new LLR housing and, if the private sector is to pick up the slack, investors will need to be sold on the somewhat counterintuitive proposition of proactively seeking to reduce rents. It may therefore be critical to the success of the that the proposal is communicated by the Mayor's office with enough emphasis on the potential upsides for investors.
Ultimately, the impact of a LLR will greatly depend on increasing the availability of new housing and we do not yet have details on how that will be achieved. There is, of course, no silver bullet to solve the housing crisis - this is acknowledged by the Mayor - but all stakeholders in the London Private Rented Sector will be watching his proposal for a LLR with interest.
Comments on the proposal can be sent to firstname.lastname@example.org