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The only way to stop a housing crisis is to reintroduce something similar to a 1980s style system of tax breaks for institutions or business landlords, according to residential property services company LSL Property Services. 

The property services group says the crisis will come about due to the lack of new house building, the increases in population, and the growth in the number of households. Government projections indicate the population will top 70 million by 2031 , as a result of increased fertility, life expectancy, and net migration.  The number of households is projected to grow by 252,000 every year up to 27.8 million by 2031 (an increase of 6.3 million or 29%) .  This is not solely the result of increases in population – even without those, the number of households could be projected to grow by 36,000 households per annum due to changes in marital status and household formation.  For instance, one-person households are projected to increase by 163,000 per year, equating to two-thirds of the increase in households.  By 2031, 18 per cent of the total population of England is projected to live alone (compared with 13 per cent in 2006).

But over the last two years, there has been a sharp decline in the number of homes being built and demand for new properties has plunged.  On an annual basis, an estimated 87,190 new homes were started in the 12 months to June 2009 - down 41 per cent compared with the 12 months to June 2008.  The figure is also little more than a third of the government's target of 240,000 new homes a year . 

If house building continues at current pace (87,190 a year), in a worst-case scenario the UK will be short 4.2m homes by 2031.  Even anticipating a recovery in house building to 149,200 a year, (the average number of new homes started since 1990 ) the country will be short of a staggering 2.7m homes.

Owner-occupation alone will be unable to stimulate house building.  Although the current mortgage market will improve, some segments are unlikely to recover.  For example, it is doubtful the sub prime sector will pick up for a number of years, if at all.  And buy-to-let mortgages are unlikely to be available to speculative landlords at the LTVs they were in the past.  The inability to finance homes won’t change the demand from people needing a roof over their heads. With the social sector unable to fill the gaps (between 1988 and 2006, social rented stock declined in size by 18% thanks to right to buy and a slowdown in new social housing build), much of the growth in homes needs to be in the private rented sector. 

LSL - which owns a mix of related companies including estate agents Your Move and Reeds Rains - says the only solution is to stimulate the private rented sector’s ability to supply the new housing in sufficient volume is by reintroducing of the Business Expansion Scheme (BES).  The BES - a package of tax incentives for small to medium sized enterprises - was launched in 1986 and helped inject money into the private rented sector (as well as small to medium sized enterprises).

At the time, the Government used the BES to turn around years of neglect in the private rented sector (PRS) .  The BES stimulated the underdeveloped PRS and arrest the lack of individual or corporate investment.  The Housing Act 1988 enhanced the parameters of the scheme further as the BES was used as a vehicle for banks, building societies, investors, property companies and property funds to acquire portfolios.

The scheme was a huge success. In the first three years of its existence (1988-1991), it raised some £400m (approximately £1,346.4m in today’s money) – mostly through institutional investors.  The total made available for Housing investment was some £3,300m - £8,349.6m in 2009 money.

The package stimulated the private rented sector effectively.  Between 1988 and 2006, private rented sector stock increased overall by 41% - nearly double the growth in owner occupation .  By 2007, the private rented sector had grown to 12% of all housing in England  - 2.6 million homes.  With similar investment via a new BES, approximately 600,000 homes could be built by 2031.

Not only would a new BES provide a valuable injection of cash into the house building sector, it would also help make the industry more corporate.  Bringing in investment from property funds and a corporate investment approach to the PRS (similar to that in Germany) – rather than a small scale speculative one – would bring more stability to the industry as corporate investors (either institutions or business landlords) invested for the long term.

David Brown, Commercial Director of residential property services company LSL Property Services plc, said: “With people’s confidence and belief in home ownership shaken, property purchase still unaffordable for many, and the availability of social housing woefully inadequate, the only way of housing our growing population will be by boosting private rentals.  A new BES would do all these things - it ticks all the boxes.”