Accessory Dwelling Units – Affordable For Renters, Profitable For Homeowners
I wrote this essay as my entry for a CapX competition several years ago, that sought ideas for how to boost homeownership in Britain. My proposal was to copy what many cities around the world have done, making it easier to add additional units to existing houses. It didn’t win, but I still believe this is a viable path forward in Britain, including the all important political viability, so I have decided (finally) to share the below essay in the form I submitted it.
There is a substantial mismatch between the housing stock in the UK and the size of households. Along with this, the cost of housing has risen to crisis levels. Certain cities in North America, facing housing crises, have chosen to encourage the development of Accessory Dwelling Units (ADUs) by homeowners to add much-needed rental housing. Experience has shown that these can provide affordable housing without requiring government subsidies. I propose that the government brings in policies to make it significantly easier for UK homeowners to add ADUs to their properties. Assuming they cost as much as extensions to construct, the total cost of construction is low enough that rents for an ADU could be significantly lower than the average for a renting a property in the UK. This, it is hoped, will reduce rents with a knock on effect on housing prices, whilst adding a source of revenue to help owners pay for their mortgages. Such development would take advantage of existing infrastructure and not require the use of greenfield land, whilst ensuring that the benefits of development are spread along a large section of the population, which should make it more politically palatable.
Background
The size of UK households has changed over the last century, as a result of changes in marriage age, smaller families, and an increase in single person households. This has led to the average household size dropping from 4.3 to 2.4 between 1911 and 2011, making the modern household 44% smaller than it was in the early 20th century. Today, 30% of households are comprised of a single person. (Office for National Statistics, 2014)1. Meanwhile the composition of the housing stock has not kept up with these changes. Only 8.2% of houses are flats, with semi-detached homes making up the single largest fraction of housing units. 49% of owner-occupied households have two or more spare bedrooms, whilst 85% have at least one (Nationwide, 2013)2. The effect of this mismatch is to force smaller households to rent homes that are larger than they may otherwise need, with the result of bidding up rents for everyone.
The government has attempted to bring these rooms into use with the rent-a-room scheme (GOV.uk, [no date])3. However, this does not offer the same privacy as a self-contained apartment, for either landlords or their lodgers. In North America, certain cities and states, facing housing crises of their own, have introduced policies to allow and encourage homeowners to add secondary rental units to their homes, known as Accessory Dwelling Units (ADUs). These provide additional rental units at a lower cost than entirely new development, due to taking advantage of existing infrastructure (Lau, [no date])4.
ADUs are “dependent apartments built onto otherwise typical single-family homes” (Coppage, 2017)5. Often they are created from basements and garages, although they can also be detached cottages located in back gardens (Brown, [no date])6. My proposal is that the government borrows this idea, and brings in new laws and policies to make it easier for homeowners to construct and rent out ADUs. I believe that there is much potential in the UK for their construction, and that they would make a significant impact on rental prices, with a knock on effect on house prices.
Policies
The main changes that I believe should happen to encourage the creation of ADUs for rent are (1) changes in council tax rules to avoid penalising owners if they do not have tenants, and (2) making them permitted development.
At the moment, annexes are charged the full rate of council tax as a separate dwelling, regardless of whether or not they are occupied (GOV.uk, [no date])7. This will discourage owners from constructing and renting out ADUs, as they cannot be guaranteed to rent out but would have to nonetheless pay council tax on the unit. I propose that council tax only be charged on occupied dwellings, so that owners will not be penalised if they do not have a tenant.
In order to encourage ADUs, attached units, whether basement/garage conversions or extensions, should be allowed to be developed as permitted development. This will reduce the fees, time, and uncertainty associated with such projects.
In cities that have brought in policies to encourage ADUs, there is often a requirement for the owner of the property to be resident in either the primary or secondary dwelling (Coppage, 2017)8. By making this a requirement, the issue of absentee landlords can be avoided, and the system will not just become another means for landlords to make extra money. As the owner will be the immediate neighbour of the tenant, they have an incentive to ensure that the tenant does not cause problems in the neighbourhood. Provided that the main house is owner-occupied, the tax free income allowance of the rent-a-room scheme ought to be extended to ADUs, to add another incentive for homeowners with room to construct such rental units.
Additionally, in order to avoid the system being used to create apartment buildings by another name, there could be a restriction to one ADU per house. Such restrictions are not unusual among polities that have adopted this method of increasing housing availability.
Occupancy restrictions could also be considered, though they may be hard to enforce (Lau, [no date])9. It is also questionable as to whether they would be a good thing – given the shortage of properties, it is preferable, though certainly not ideal, that a family be placed in a one bedroom cottage temporarily than housed in a room in a Bed and Breakfast. Limiting such units to a single person would also prevent their rental by couples who are wishing to save up for a deposit to get onto the housing ladder, reducing their effectiveness as a means to boost homeownership.
Potential for increasing housing
The UK has, in my view, a large potential for ADUs. There are a great deal many homes in this country which may be suitable, ranging from Victorian terraces with basements and the option for an external entrance, to semi-detached council houses with room at the side for an above garage flat. There should easily be enough room for a great deal many studio and 1-bed apartments and backyard cottages.
Experience from America has shown that ADUs can add much needed affordable rental housing, including in otherwise expensive areas (Lau, [no date])10. A study by the University of Berkeley found that “30 percent of ADUs were affordable for very low income households, defined as those earning 30-49 percent of the area median income (AMI) with an additional 49 percent affordable to low-income households earning between 50 and 80 percent of area median income”. If that holds true in the UK, it would offer the prospect of significant reductions in rents.
ADUs are likely to reduce rents, but that is not the only benefit. Provided that there is a requirement for owner-occupation of the main unit, landlords would be within immediate reach to sort out issues. With a multitude of landlords, competition should act to drive out the worst landlords from the market.
Impact on homeownership
For homeowners, the ability to earn money from renting out an ADU would reduce the burden of servicing a mortgage. This is one of the two major reasons why people add them, the other being to house relatives. The extra income will help service a mortgage. Construction costs are typically lower than new construction on vacant lots, allowing owners to become landlords on a lower budget (Lau, [no date])11. Outside of London, extensions can be constructed for around £1,200 per square metre, whilst the cost of adding a bathroom is around £5000 (Household Quotes, 2018).12 The average cost for a new kitchen is £8000, but it is reasonable to expect that small ADUs would not have a complete kitchen, rather than a kitchenette, so the cost should be lower than this. Given these figures, constructing a ground floor studio apartment of 20 square metres in size should cost around £37,000, though there is reason to believe that it would be significantly cheaper than this. If rented for 10% of this per year, such a unit would rent for ~£300 a month. If instead it was rented for the typical gross rental yield of 4.2%, the monthly rent would be a mere £130 a month (Blackmore, 2014).13
By providing a source of lower-cost rental housing, ADUs should encourage the release of housing currently used as rental properties onto the market, reducing house prices and making it easier for people to get onto the housing ladder. Furthermore, by adding much needed accommodation for individuals, they offer the prospect of helping older people to downsize, perhaps to a relative’s ADU, freeing up larger homes for sale or rent.
In addition to this, reduced rents will make it easier for would-be homeowners to save for a deposit. This is one of the biggest hurdles first time buyers face in getting onto the housing ladder (MoneySuperMarket, [no date])14, and it is difficult to save money when you're spending a large amount of your take home pay on rent each month. There are likely many people who would be willing to live in an ADU for a few years if it enabled them to purchase a home of their own.
Political feasibility
Politically, ADUs are a form of housing which are (1) environmentally sustainable, (2) protects green spaces, (3) ensures that profits from development accrue to homeowners, rather than large big box house builders, and (4) minimises disruption to neighbourhoods.
One of the biggest objections to new housing is the fear of concreting England's green and pleasant land – people do not wish to lose greenfield sites. ADUs, however, would be placed in existing developed areas. They add housing without requiring development of greenfield sites or large scale redevelopment of estates. Since the new housing would be added literally in people's backyards (with their consent and benefit, of course), this objection loses it's teeth.
The benefits of development are dispersed among a multitude of small scale landlords. To paraphrase Chesterton, we do not have too many landlords, but too few. The economic benefits arising from new development would accrue not to large scale developers, but to the ordinary homeowner who chooses to add an apartment to their property. This should help in gaining support from people who would otherwise face all the downsides of development without gaining anything from it.
This kind of housing adds “hidden” density, thus preserving the look of neighbourhoods and minimising disruption to towns. Redeveloping an estate by levelling it and building to a higher density is incredibly disruptive, and in most of the country would not make economic sense. However, adding some backyard cottages would be a different matter, which could increase their acceptability. By adding housing in existing areas, it becomes far easier to provide services to the residents – expanding provision of schools and doctors surgeries becomes a case of expanding the existing service providers, rather than adding completely new ones. By increasing the density, people do not have to travel as far, leading to a reduction in car use and enabling people to live more environmentally sustainable lifestyles (Lau, [no date]).15
Conclusion
I believe that Accessory Dwelling Units represent an under-appreciated option for helping resolve the housing crisis, by leveraging existing infrastructure and private capital to provide affordable housing. I believe that, were these to be developed, it could make a significant amount of new affordable housing stock available in this country, and go a long way to meeting the housing needs of the UK. They are a free-market solution that relies on the actions of many individuals working in their own self-interest – the main thing the government has to do is to get out of the way.
There is in my view much potential for ADUs in this country, whether in the basements of Victorian terraces or the back gardens of semi-detached ex-Council houses. The owners of such houses would benefit from having additional income with which to pay their mortgage, whilst an abundance of such dwellings should bring down rents and make life cheaper for renters, a classic win-win scenario.
ADUs offer the possibility for significant reductions in rent, as well as providing a source of income for homeowners that they can use to support the cost of a mortgage. However, in order for these possibilities to be realised, government policy will have to change to avoid penalising the owners of such units through the tax system. It would be helpful for the government to make ADUs part of permitted development, so as to make it easier to construct them.
ADUs add housing without consuming greenfield land, an emotive issue UK housing politics, and a point in their favour that should make them acceptable to the electorate. The financial benefits from development do not accrue to large developers, but to ordinary homeowners, which offers the prospect of turning NIMBYs (Not In My Backyard) into literal YIMBYs (Yes In My Backyard). The new housing added increases the density of an area without requiring disruptive redevelopment, as well as being more environmentally friendly.
For these reasons, I believe it will be an easier sell politically than other proposed solutions.