Be careful what you campaign for

The first big housing policy debate to erupt in the New Year is long overdue: rent controls in the private rented sector.

The basic case that ‘something should be done’ is clear. Rents in the high pressure areas of the country have been taking an ever-increasing share of flatlining incomes, and not just in London. That implies that action should be taken both on rents and wages, but it is rents that detain us here. The cost of the sector to the State has been rising rapidly, not only through growing housing benefit (predominantly to assist private renters in work with low incomes) but also through the unrecognised and steadily accumulating cost of tax reliefs. There are signs of a decline in standards, especially at the lower end of the market: ‘beds in sheds’ has hit the headlines but there is also more sharing, more overcrowding, and more conversion of whole houses into small flats. Many more families with children are being accommodated in the sector and the absence of security and stability is unacceptable: as the Social Mobility Commission concluded, ‘the current private rented sector offer – developed in 1988 – is not fit for its new purpose of housing families with children over the long term’.

Harsh changes to the housing benefit regime are only just beginning to work their way through, with unpredictable outcomes: there is plenty of demand for homes and landlords will be less inclined to let to households on housing benefit. Excluded from home ownership and social housing, if poorer people are increasingly excluded from private renting, homelessness is the only likely outcome.

Like many on the left I believe instinctively in the regulation of prices that make a big difference to people’s ability to make ends meet, like rents, energy and fares. But I am still unsure about what to do with rents and concerned that some of the more radical policies being advocated will make things worse not better.

I am certain that the revival of private renting over the past 25 years has been a public policy disaster, giving consumers a much worse deal at greater cost to the State. It has been largely at the expense of home ownership and social housing (being created largely by transfers between tenures rather than new build), which are far preferable tenures that cost the State less. Buy to Rent has become a monster that has stoked up prices, soaked up tax relief, and damaged the home ownership market.

The private rented sector needs comprehensive regulation of standards, contract terms, and management. It is the last unmodernised dinosaur industry with a hopelessly fragmented system of supervision. Sensible landlords recognise the need for professionalisation of the sector within a strict and clear framework.

But what to do about rents given where we are? To create a rational policy you wouldn’t start from here: people should be entitled to have an affordable home even if there is great scarcity. It would help if the discussion was less opaque. The phrase ‘rent control’ is bandied about with little definition. A survey for Generation Rent showed that the majority of people were in favour of rent control, but what did they have in mind when the answered the question? My greatest concern is that not enough thought is given to the long term implications of policy options: the one thing worse than a rapid increase in private renting would be a rapid unmanaged contraction.

There are two main options for rent regulation; mitigation of rent increases and the setting of rents within pre-determined capped levels.

A 38 Degrees petition has received a lot of coverage and support, calling for rents to be capped at a maximum of £195/week for 4 bed houses (significantly less for smaller properties). London Mayoral candidate Diane Abbott MP has backed Generation Rent’s proposal that monthly rents should be set at 50% of the annual council tax bill: landlords would be able to charge more but subject to a 50% tax. In both of these proposals there seems to be little rationale behind the choice of rent levels, producing seemingly arbitrary figures, and there is no assessment of landlords’ costs to enable a prediction to be made of likely landlord response. Generation Rent’s proposal is also linked to a hopelessly out-of-date and chaotic property tax.

If rents fell by, say, one-third, would landlords make a profit? And if they don’t, what would they do? What would happen if capital growth also reversed, as some are predicting for later this year? Alex Hilton of Generation Rent seems to relish this, as more homes would be released on to the market at cheaper prices for potential home owners, potentially triggering a price collapse. My view is that policy has to aim to hold house prices steady for a generation, declining in real terms, avoiding a burst bubble, which creates as many if not more problems as it solves. A flight of landlords and a collapse in prices, a property bear market, would create a lot of homelessness, worsen not improve access to rented housing, and create another negative equity nightmare.

Is there a more rational basis on which to determine the absolute level of rents? Should they, for example, be based on a return on value? Assuming we are not around the corner from a confiscatory command economy, this at least would be a more logical approach. In London, a landlord seeking a gross return (before taxes and costs, including the cost of capital and any service charges) of 4% on a property worth around the average value of around £520,000 would be charging more than £400 per week, more than twice as much as the maximum cap proposed in the 38 Degrees petition. A typical one bedroom flat worth around £250,000 would require a rent of around £200/week. It has its attractions, but I’m not sure that the bureaucracy of such a system would add to the well-being of tenants or landlords.

What this shows is that high rents are a symptom of a much bigger housing market and housing policy failure. House values lie at the root of the problem. Of course some landlords are rapacious, especially those that own houses let by the room. Of course many fail to meet minimum standards of amenity, maintenance and management. Of course landlords will seek as much as they can and they will probably not flee the market if their margins are trimmed. Of course tenants feel exploited, because their incomes have been constrained as their rents have risen. But we must search for solutions that make things better not worse.

Labour’s proposals to mitigate rent increases by index-linking rents during longer tenancies has provoked a wide response. It has been dismissed (disingenuously) by Generation Rent, who say that it ‘no longer matters which flavour of government we have’. Yet it has also been parodied by Grant Shapps as a ‘Venzualan-style’ socialist policy.  I wonder if Grant also thinks that of the interesting New Year report from the right-ish think tank Civitas, which also called for strict restrictions on rent inflation during tenancies of indefinite length, as part of a wider policy to manage the balance between tenures and move away from demand subsidies. I don’t agree with all of it, but it presented a coherent argument and their critique of the demand subsidy approach is an important commentary on the policy agenda of the Coalition.

Labour and Civitas share a lot in common with the German system, which is also based on inflation-linking rent increases during a tenancy but allowing market rents to be determined when a new tenancy is formed. The Germans also have a law against rent usury which I rather like as a backstop control over extremes.

It would be nice and easy to jump on the rent control bandwagon. Generation Rent will accuse people like me of being willing to subject private tenants to exploitation for another generation to come. But I don’t want to go from this bad place to an even worse one. The economics of private renting are not as easy as people like to pretend, and the search for simple slogans does not always lead to good policy.

And I certainly believe that it matters who forms the next Government. The Tories want more deregulation, not less. Labour will introduce a sensible – and correctly cautious – system of rent increase regulation. In addition to the other proposed reforms, it is a policy that private tenants should vote for.

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7 Responses to Be careful what you campaign for

  1. Pingback: I invent a tiresome electoral marketing concept | The Yorkshire Ranter

  2. Pingback: So, rent controls will drive ‘three out of five landlords’ out of the market? | Red Brick

  3. joehalewood says:

    One issue missing from this London centric article is how London is exporting its higher rents too and while it’s a slow burner it will increase quickly should the Tories remain in power as the welfare reform (sic) policies will then be ramped up.

    The truly perverse high private rents in London combined with the benefit cap and its proposed reduction to £440 per week will impact in Hull and the lowest rent areas with the homeless diaspora such policies are creating and including the LHA cap.

    Caps and cuts = increased homelessness = increased cost of temp accommodation and increased demand for it. So the net spreads from London to say Luton. Luton then has a problem of increased demand = higher rents = diaspora to Birmingham and then the process replicates till it reaches the very north of England.

    The lack of any discussion on PRS regulation has led to ‘radical’ solutions as proposed above and the same mistake will happen if we ignore the homeless and rent inflation the perverse London market creates. The PRS lack of regulation crisis now affects London yet its impacts will hit the whole of the country leaving social landlords ‘oop North’ unable to afford to let to the 2 parent 3 child family as the risk of arrears is too great.

    Though I suspect the myopia with which ONLY London’s issues are ever seen will mean that won’t happen as housing is so London centric and has always ignored the provinces

  4. Pingback: The grass isn’t greener on the other side | Red Brick

  5. Paul Lusk says:

    Thanks Steve for this wise and thoughtful analysis. Rents that give a landlord an economic return are not much less than the cost of purchase on a mortgage, but mortgages are not available to many who are forced into renting with short-term contracts when they would prefer a more secure product. Why? The Bank of England imposes tight controls on mortgage lending for two reasons: first, to allow for the risk of rising interest rates (stress tests require lenders to test for a massive 3% rise in bank rate within 5 years); and second, and arguably more important, to prevent a renewed housing price bubble. Here we need to remember that in the 50 years up to the 2007 crash, owner-occupation was supported by house price increases that became factored into borrowers’ expectations and outstripped the cost of capital, making housing free or better and eventually causing the crash. Now the buy-to-let market, often funded by mortgages that disallow long-term tenancies, has displaced owner-occupier purchases. It’s a broken housing market. So why can’t there be a vehicle that offers longer leases to tenants funded by reasonable return to investors? One answer is that if funded by deposits, it would be vulnerable to interest rate risk. It would need to manage this through a mix of equity funding and managing its portfolio with a mix of short and long term tenancies with capacity to sell on the open market. The capacity to manage such a venture is in the larger housing associations – but is the Left ready to accept such a development in the regulated sector?

  6. Alistair McIntosh says:

    Excellent as usual

    Just one extra point about being careful

    The left has long argued that the state subsidises private landlords through housing benefit

    The Centre for Policy Studies is turning the tables by claiming that housing benefit subsidises housing associations – it is a blatant attempt to say don’t bite the hand that feeds you

  7. neale87 says:

    We need to know what shape of economy we want which deals with land rents. Rent controls are very much a tricky regulatory approach to the problem (but important to consider in light of mortgage restrictions that limit the ability for private owners to compete with landlords to buy).

    The approach developed by Dr Adrian Wrigley under his work on Systemic Fiscal Reform is to switch to the equivalent of a high Land Value Tax using “Location Value Covenants” (see http://www.prosper.org.au/wp-content/uploads/Progress_1098_Spring2010_web.pdf).

    I prefer that approach to continuously trying to tweak the fundamental flaw in our economic system – that we gift monopoly incomes to land and resource owners. We should aim to move to a system removes (taxes) that perverse, unearned reward and returns it to citizens a universal income (aka Citizen’s Income & Basic Income).

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