How big should a rental sector be?

27 Nov 2014 | Richard Kemmish


In a recent post I made a comment about the credit quality of buy to let mortgages in a cover pool differing depending on the level of home ownership in society and mentioned the vast range in the size of the rental sector within Europe. It provoked the question, what is the optimal level of home ownership?

Received wisdom in anglo-saxon countries is that home ownership is A Good Thing. Own property and you participate in the economy, more importantly from the perspective of the government, amortise the mortgage and you have no material funding costs post-retirement, hence the burden on the state pension system is lower. 

As mortgage technology – such as equity release – becomes more prevalent home ownership also provides a social buffer. People can redraw their mortgage when struck by a temporary life event that could otherwise be a credit event, whether positive (childbirth) or negative (injury).
 
Thatcher and Clinton (there’s incongruous) both saw that increasing home ownership in society also increases social mobility. ‘Right to buy’ – the piece by piece privatisation of the housing estate that I grew up on - had an immediate and tangible effect on economic and social aspirations. It helped to break down the social chasm between those who paid rent to Birmingham City Council and those who paid their mortgages to Abbey National.

Whereas Thatcher’s model succeeded (I would argue), the general perception seems to be that Clinton’s attempt to increase home ownership was one of the seeds of the crisis (Clinton made people aspire to housing that they couldn’t afford, Thatcher kept them in the same properties but changed the homeowners from debt to equity).

In the opposing corner, the German model, both the lowest home ownership rate in Europe (45%) and a weaker wealth/ownership correlation than most countries (rich people rent too). This model has recently found support from the OECD who argue that a vibrant rental sector is important for both economic mobility and as a social net. 

German friends have always told me that the British model is rooted in atavistic views of the relationship between land and wealth and, what is worse, it depends on ever increasing house prices and encourages inappropriate speculation.

In reply I’ve always told them that their model only works if you can continue to assume negligible inflation and the ability of the state to provide in old age, assumptions under threat from the response to the credit crisis and demographics respectively. 

Two things though are clear – an attempt like Clinton’s to artificially force the country towards a different level of home ownership can generate credit problems. Secondly, such concepts as ‘buy-to-let’ are vastly different in societies where the rental sector is correlated with poverty (the UK) and where it is not (Germany).

In other words, the credit analysis of collateral is always very nation specific. Yet another complaint about over zealous harmonisation of covered bond rules.


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