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Should we worry about rent control?

Ian Wilson, Managing Director, Martin & Co, thinks that maybe we should…

The Negotiator

to let / let by boards imageThe local government election result suggests that Labour is on the road to electoral recovery and it’s conceivable that we may see Ed Miliband leading a majority labour government in the next parliament.

Some left-wing thinkers and journalists have started to float the idea of a labour government re-introducing rent control as a popularist measure. There are several strands to their arguments:

GREEDY AGENTS & LANDLORDS

Rents are rising and biting particularly hard on young professionals in London where rents are rising in real terms. The perception is that greedy landlords and their profiteering agents are taking advantage of a shortage of rented accommodation and a lack of alternative tenure options, since mortgage market rules continue to defeat the first time buyer. Ken Livingstone narrowly missed being elected Mayor of London and one of his pledges was to set up a council run letting agent to undercut the existing agents and take the heat out of rent rises.

SPIRALLING BENEFIT COSTS

Housing Benefit spending has risen from £11bn in 2000-01 to £21bn in 2010/11. If there are no changes in policy it will reach £25bn in 2014. The Coalition response has been to cap benefit for recipients. This is seen as rough justice and although it’s too early to say, because the caps are only now coming into force, there is a belief that we will see thousands of families displaced from high rent areas. If landlords were limited in the rent that they could charge then there would be a saving to the Exchequer and settled communities would not be uprooted.

THE BUY TO LET LANDLORD

Landlords are a new class of asset owner and have done rather well for themselves. The ‘average’ landlord has multiple properties – it depends which research you read but a figure of somewhere around six properties each is plausible. This does not make landlords rich, the majority still have mortgage debts to service from rental income but this misses the point – when would-be first time buyers cannot afford a home of their own, individuals who own multiple properties are seen as anachronistic. I once made the mistake of explaining my pension plan to a journalist – I said that if you could own just ten properties, debt free by the time you retire you would enjoy an income of around £5,000 per month and could draw down capital to pay for holidays, cars, health care as you wished. I got a very frosty reception and in a second I realised that my journalist contact was fretting about where to get the cash for their first property, not the next nine.

Rising rents and spiralling benefit costs, where do we go from here?’

The renaissance of the private rented sector has its roots in the Thatcher government’s decision to reverse decades of rent control and to allow new lettings at “market” rents on Assured Shorthold Tenancies, which guaranteed the landlord the right to recover possession. To this day there are elderly sitting tenants enjoying “Fair Rents” under the Rent Act 1977 which contained a formula that a rent should be set with regard to the size, age, character, locality and state of repair of a property but dis-regarding the shortage of rented accommodation.

Rent Officers had to inhabit a parallel universe in which they imagined that if demand for rented accommodation was met with just enough supply, what would the rent be? The answer was about half the market rent; or at least that was my recollection when I worked as a 24-yearold Rent Officer in Tyne & Wear in the late 80s who had to deal with disgruntled landlords who felt they were carrying the burden for the failure of government housing policy.

The reason was that rent control usually goes hand-in-hand with tenancy rights and security of tenure. This is because if you have security but the landlord can put the rent up, then he can price you out of the accommodation. Similarly, if your rent is controlled but the landlord can give you notice to leave, provided he has a more profitable use for the accommodation his economically rational strategy will be to clear out his tenants.

In the 1970s and 80s the tenure sector that was growing was owner-occupation. If an elderly sitting tenant died then the landlord would sell to an owner-occupier. They would not contemplate letting to another tenant, because to do so would mean a controlled rent and another lifetime of not being able to recover possession (in broad terms anyway).

This became translated into a rather cynical game at the auction houses where a property for sale with very elderly single sitting tenant was worth considerably more than a similar property but with a middle-aged couple in occupation. It was known as the “expectation value”. During the 70s and 80s the private rented sector continued to decline until it reached its nadir of 9 per cent of the total housing stock, down from 90 per cent at the turn of the 20th century.

Barnard Marcus signboard imageSo rent control was bad for new investment in the private rented sector, it made landlords reluctant to invest in their properties and it distorted the labour market because someone with a controlled rent and a tenancy for life was very unlikely to give these things up and move on.

Who was rent control good for? Affluent middle aged people who are settled in a locality do well out of rent control, in their case it’s a subsidy which passes directly from the pocket of the landlord to the pocket of the tenant. Rent control is also good for a Government that wants to cap its Housing Benefit bill.

THOSE IN FAVOUR

In The Guardian Blog in November 2011, Councillor James Murray, executive member for housing at the London borough of Islington wrote:

“There seems to be an accepted myth that rent regulation just isn’t right for England, that it is impossible to have a sizeable and successful private rental sector if you have limits on rent rises and longer term contracts for tenants.

The myth cautions us that the decline in private rent over most of the 20th Century coincided with a period of particularly rigid rent regulation. This decline was only arrested in the 1980s and 1990s thanks to free market rents with little stability for tenants, it is said; these conditions are required to support the sector’s current growth.

But the myth is problematic. It fails to analyse closely the wax and wane of the private rented sector in the context of the fortunes of social rented and owner occupation. On the basis of England’s particular history of rent regulation, it effectively rules out the possibility of future interventions altogether.

Like all long-held myths, it must be challenged. In fact, challenges to the accepted orthodoxy can be found without needing to scratch very deep. Research commissioned by the last government but published after the 2010 election suggests we should not be so ready to dismiss opportunities to change the way the sector works. The study shows that the accepted view, that rent regulation reduces the size of the sector and discourages investment is not borne out by international comparison. Countries such as Germany balance a large and decent private sector with limits on rent increases and long term stability for tenants.

The discussion will require us to be clear what we mean by rent regulation. Historically, the form of regulation that England experienced seems to have made our country wary of looking at other forms of rent regulation which are commonplace overseas.”

Since then, the discussion rumbled on. In March 2012, Jeremy Corbyn, Labour MP for Islington North, asked Housing Minister Grant Shapps, “Almost a third of my constituents are private tenants who pay very high rents in flats and houses that are expensive to heat and often badly maintained.

Does he not think that it is time that we had much tougher regulation of the private rented sector, including rent regulation, because rents are astonishingly high for people who are unable to save or to move on from the it?”

The Minister said, “If we introduce rent control we know exactly what will happen. Rent controls were introduced after the war and the private rented sector shrunk from 50% of the market to just 8%. When rent controls were removed, it doubled to 16%. Rent controls would restrict the market and make it more expensive for exactly the constituents whom the Honourable Gentleman is trying to protect.”

So what is a private investor to do? Well, a Labour government committed to re-introducing rent control is still a way off but if they want to de-risk here are some strategies:

  • Invest in properties that are easy to sell and have potential for future capital growth – you can sell if you need to
  • Let to tenants who might buy the property from you – you might have a ready exit
  • Buy properties at higher rental values – these are the least likely to be capped
  • Consider fully furnished lettings – properties which are suitable for short term letting only might escape rent control.

Finally, the best advice is to make sure you keep abreast of the news in this area; many in the private rented sector would really prefer not to see a return to rent control, so we all need to watch and listen to what the think tanks are suggesting and what is said – or inferred – in political manifestos.

Join the debate: email your views to the editor:
Sheila@propertydrum.com

June 7, 2012

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