There’s no denying that private renters are feeling the strain of a longstanding affordability squeeze. For the past 15-20 years, rents have taken up a persistently high proportion of renters’ incomes, compared to housing costs for those in other tenures. Renters now spend an average of a third of their incomes on rent – and for those in high-cost areas it’s considerably more. This squeeze on disposable incomes leaves renters more exposed when other costs like energy or food spike, as we’ve seen frequently in recent years. It also leaves them with precious little leftover each month to put away into savings or cover unexpected costs, eroding their financial security.
And millions more households are subject to the rent squeeze now than 20 years ago. The private rented sector increased in size by 2.7 million homes between 2000 and 2020; almost 1 in 5 households now live in a privately rented home. And it’s not just young professionals, as headlines often assume: just under a quarter of all children now live in the PRS, and the number of people aged over 65 living in a privately rented home is forecast to reach 2 million by 2040.
It’s no surprise, then, that polling by More in Common for JRF found that 79% of the public think the government should be playing a role in making private rents affordable.
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So what can actually be done about the rent squeeze?
The government has moved boldly on housing supply — planning reform, new housing targets, and a new Social and Affordable Homes Programme. These are the right things to do: structurally, high rent costs relative to incomes stem from an imbalance between the supply of and demand for housing. Increasing supply is vital to ensuring sustainably affordable housing in the long run. But we need to be realistic about the timescales needed to materially reduce rent levels through new supply. Even if the government hits its ambitious target of 1.5 million new homes this parliament, the Office for Budget Responsibility forecasts that rents will continue to absorb all average wage growth until at least the end of the decade. And this is before we consider the significant headwinds – including high interest rates and significant build cost inflation – facing efforts to ramp up housebuilding. Supply-side measures are essential for the long run – but they cannot act on the rent squeeze facing today’s renters.
The benefit system offers another lever, but a limited one. Housing support through Universal Credit and Housing Benefit is vital for lower-income renters — but around a million households receiving housing support live in properties with rents above the level these benefits cover, leaving them to make up the difference from already-stretched incomes. What’s more, the rent squeeze extends well beyond those eligible for these benefits. In London and other high-demand areas, median-income renters are also spending well over 30% of their income on rent. The benefit system was never designed to fix affordability pressures this far up the income distribution.
Which brings us to rent controls — and why we can’t afford to ignore them. Our modelling suggests that if a rent control that capped rent increases at CPI within tenancies and CPI + 2% between tenancies had been introduced from 2025/26, renting households would be an average of almost £1,200 per year better off by 2030/31 – a significant, near-term boost to the disposal incomes of renters, and a meaningful downpayment on the future supply the government is trying to deliver.
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So what’s not to like? Despite rent controls offering a direct lever for the government to make renting more affordable, they remain highly contentious – owing largely to concerns that constraining landlord incomes would either lead to a sell-off of homes – potentially reducing rental supply, at least for those with the least buying power – and/or reducing investment in the existing stock, worsening housing quality.
These are concerns we should take seriously. And they turn on a key question: are landlords making profits in excess of the levels they need to make their investment worthwhile? Or to phase the question like an economist: are they making supernormal rates of return?
To answer this question, we at JRF commissioned a first-of-its-kind analysis of the rate of return landlords have been making – and the analysis shows that the sector has generally been characterised by landlords making supernormal rates of return. Even in the most recent period, a strong majority have made rates of return on their rental investments that exceed both economy-wide returns from comparable investments and rates of return in the broader real-estate sector. This is a really significant finding. It reduces the risk that a rent control would lead to landlord exit – as rental still remains profitable compared to alternative investments.
That said, the transition needs to be managed carefully. A minority of landlords, though a significant one, are more vulnerable than others to making a loss on the rental income side of their business: those who are heavily mortgaged and been hit hard by the interest rate rises of recent years. Introducing a rent control that constrains rental income growth, without any mitigations in place for this group, could risks hitting this group hardest and potentially triggering the kind of rapid sell-off that critics fear.
This is where tax reform enters the picture. The current tax regime for rental income is neither efficient nor particularly fair. Landlords pay no National Insurance on rental income, meaning they face a lower effective tax rate on that income than workers do on equivalent earnings. Meanwhile, the 2017 changes to mortgage interest relief — though successful in helping first-time buyers compete for homes — have, in the post-2022 higher interest rate environment, created a situation where some mortgaged landlords are taxed on revenue rather than profit, pushing them towards post-tax losses even when they’re nominally making money.
Making changes to the tax treatment of rental income is sensible in its own right and has broad support across the political spectrum. Our modelling shows that reinstating full mortgage interest relief, while applying National Insurance Contributions to rental income, would rebalance the tax burden in a way that relieves some of the burden on the most squeezed landlords while raising more from those making the largest profits. Critically, the combination of these tax reforms and a rent control would actually see fewer landlords making a negative return on their rental income by 2030 than will be the case under current tax arrangements and no controls on rents. Combining rent control and tax reform thus offers an impactful, viable way of tackling the rent squeeze in the near-term for renters, with some added improvements to the tax system into the bargain.
Economics 101 tells you that price interventions in a well-functioning competitive market do not work. But the housing market it not a well-functioning competitive market. It is characterised by significant supply constraints that offers landlords the opportunity to charge higher rents and make higher profits. The long-term solution is to increase the supply of homes, but this is difficult and takes a long time – time the renters spend facing an uncompetitive and unaffordable rental market. This is not a question of controlling rents OR investing in the supply of housing, the solution lies in controlling rents AND investing in the supply housing – where controlling rents provides a down payment on the future benefits of that investment.
