A solution to the housing crisis?

The bad news is that you can’t be nineteen forever. The good news is that you can always live in the same kind of accommodation you lived in, aged nineteen, forever.

The “co-living” movement essentially aims to expand the student accommodation model to people who are no longer students. It is the basis of initiatives like The Collective, which offers a ”new way to live in cities”, by combining private ensuite rooms with shared spaces.

Like Help to Buy, shared ownership and flat-shares for the middle-aged, co-living is a symptom of a wider lack of housing affordability in large cities.

A report this week from the Social Market Foundation, commissioned by Barclays, pushes this idea to a new extreme by making the case for buying, rather than simply renting, studios in co-living buildings. According to the SMF, this could improve affordability and lessen other problems, like loneliness. Its report is audaciously titled: Co-living: A Solution to the Housing Crisis?

There are a few problems with this solution.

First, the risks to investors in these assets are unique and potentially severe. The report points out that “creating a liquid market … will be crucial if co-living is to be a success”. The actual asset is simply a room or studio in a building, and its value depends heavily on nearby rooms that are not owned by the buyer. These rooms may be subject to managerial decisions on behalf of the actual owner, and any owner-occupier is exposed to the way their neighbours use them. A survey cited in the report states over half of participants pointed to “bad neighbours” as their greatest concern about buying a co-living space.

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For this reason, the value of the asset can quite dramatically fluctuate depending on the behavioural patterns of neighbours, to a far more extreme degree than in normal housing or flats. This might make the space worth less than it would actually be worth if it were cordoned off – a kind of tragedy of the common room.

Second, the loneliness issue, as asserted in the SMF report as a benefit of this approach, doesn’t make much sense. Co-living is already the standardised approach to housing for graduates in major cities, but it takes place over-the-counter, in residential property formerly used by families and owned by small-scale buy-to-let landlords, rather than the institutional variety. It is already normal for young people to live with other young people. It is completely unclear whether this alleviates or exacerbates loneliness.

Third, the approach depends on extending the student accommodation model, but that model is designed for renters rather than buyers. This is because people expect to stay at university for a short period of time, in the same way they expect to be financially forced to share with other graduates in a new city for a short period of time.

Sharing accommodation might be marketed as a perk, but the evidence implies the opposite. Tenants generally pay less if they share with more people, because of the obvious way in which their ability to consume space and facilities is curtailed (alongside other negative externalities).

The student rental accommodation approach benefits from government lending to students, as well as implicit support from parents. One problem for the co-living rental model is that there are no direct government cashflows. In fact, it works the other way, because graduate disposable incomes are reduced by repayments on student loans, and the parental support is likely to be lower.

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Finally, rental student accommodation appeals to investors in the first place because rents provide long-term inflation-linked cash-flows. An alternative approach, where rooms are sold rather than let out, would contradict the purpose of the institutional framework that has already evolved.

Also, students (or their parents) may tolerate rental agreements with punitive inflation links at university because they only expect to stay there for a short period of time, or because they are consumers in uncompetitive markets (where they have to live in a specific building). Co-living accommodation may struggle to implement the same investor-friendly inflation links, especially when the bulk of private landlords are quite insensitive to inflation and often cut rents annually in real terms as a result. Any young person who bought these assets would be vulnerable to changes in the still-evolving rental market from which their prices are ultimately derived.

To be fair, the report identifies several other issues with the idea, including service fees, minimum space requirements and land required for viable developments.

The entire proposition is still in its early stages. Like all the others generated by affordability woes to date, it seems to assume that prices in expensive cities will remain stable. The good news, and the bad, is that prices probably can’t be stable forever.

Related links:
Why the housing ladder doesn’t exist anymore – FT Alphaville
Let them eat cake that they have cooked from scratch – FT Alphaville

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