The Labour Party policy ‘teaser’ on the private rental sector

 

The current Labour Party policy on meeting the challenges and problems presented by the growing private rental market contains an over emphasis on rent caps with little mention of the importance of introducing a tax framework that will incentivise sound management of private rental units.

In addition there is little to suggest how best to deal with the ‘criminal element’ amongst letting agents and the minority element of roguelandlords. The throwaway line of ‘scrapping letting fees’ is simplistic; good letting agencies match tenants and landlords and are entitled to an income.

The policy is flawed and exposes a huge target to the ‘laws of unintended consequences’. The 3.8 million households in the private deserve better than flawed thinking, false hope and disingenuous solutions.

To be fair I am not sure if Labour has a policy in this area; so far it has been confined to mentions in speeches by Ed Miliband on the current favourite meme on ‘rip off Britain’, hence the word ‘teaser’ in the title.

Some key facts

  1. 3.8 million households rent in the private sector
  2. Average rent is £164 per week. This compares to £83 per week in the social sector
  3. 26% of homes in the private rental sector are in receipt of housing benefit
  4. Private rental sector units are predominantly older than social (council and housing association) units with all the usual issues with damp and energy efficiency.

(Source: English Housing Survey Headline Report 2011-12)

The problem with raw rent caps

Rent caps don’t work alone; Germany has a system of controls that limit rent increases to a reference index based on a database of reference rents. Usury rents are prohibited. In addition Germany offers tax breaks to landlords allowing rents to be taxed as an investment. The financing model is also more receptive to long term tenancies.

Rent caps are no substitute for increasing the stock of housing; housing starts in the UK are at an all-time low. New Labour built fewer council houses than Margaret Thatcher; yes I didn’t believe that either when I first read it.

Rent caps are no substitute for reforming the planning laws; removing some of the bureaucracy and taking a more nuanced look at the ‘green belt’.

My main point on rent caps is that it would be wrong to import rent caps from other countries without understanding context, and in particular financial incentives and frameworks.

Rent regulation existed in the whole of the UK between 1915 and 1980 and is credited with causing a massive decline in the private rental stock, down to 8% of households at its lowest point. From my own experience of living in London in the mid to late Seventies renting was lot harder than it is now with unfurnished property almost impossible to find. Fortunately squatting was not a criminal offence as it is now.

The 1988 Housing Act abandoned regulatory controls and ushered in an era of private contract with rents set by the market. Private rental units increased significantly but without the essential changes necessary to provide decent ‘consumer protection’ to tenants, a legal framework with adequate teeth to deal with undesirables in the market; the usual flawed approach of leaving everything to the market.

Effective legislation needs to address 3 key areas

  1. The criminal element.
    1. Letting agents that exploit the vulnerable through an extraordinary array of charges often for non-existent work or where the charge has no relation to the cost of the service provided. The latest ‘trick’ apparently is where the landlord is happy with pets the letting agency sees the opportunity to charge a pet processing fee. So there is the need for a UK wide register of letting agents, with a schedule of allowable fees and full transparency.
    2. Landlords who deliberately let sub-standard property need to feel the full force of the law. Sub-standard property impacts people’s lives. Children are particularly susceptible to mould and damp.

There exists a considerable body of existing legislation that is poorly enforced. Low prosecution rates have a lot to do with unnecessary bureaucracy and poorly crafted legislation.

Penalties for landlords, who persistently flout legislation with regard to basic acceptable conditions, and health and safety, should include, as a last resort, the compulsory purchase of the property unit and its placement in the social sector.

  1. An intelligent tax framework that incentivises landlords to invest in property improvements and maintenance, especially with regard to energy efficiency.
  1. A standard and unambiguous charter of rights and responsibilities for both tenants and landlords with an easily understood and accessible framework for dispute resolution.

 

A charter for both landlord and tenant

A charter should reflect the reality that property is an asset to the landlord and a home to the tenant. Too often we hear landlords referring to a rented out property as ‘their home’; it is not, it is an investment.

What a tenant has a right to expect

  • The right to privacy (to include fitting their own locks) and enjoyment of the tenancy
  • The right to a clear understanding of the financial implications, in particular when rents may increase
  • The right to a range of long term tenancies such as 3, 5 and 7 years. This is particularly important to social and community cohesion. People are more likely to ‘contribute’ where they are allowed to put down roots.
  • The right to enjoy the property as a home and to personalise (re-decorate) the property appropriately
  • The right to expect that deposits are held safely and returned in a timely manner.

What the landlord has a right to expect

  • A right to prompt payment of rent together with a commercial rate of interest for late payments
  • The right to regaining possession as per a schedule of allowable events (non-payment of rent, end of agreement, retirement of the landlord, family break-up of the landlord, death of the landlord, are all examples)
  • The right to the structural integrity of his property
  • The recognition that the landlord has a right to make a fair profit

 

Owning property

“An English man’s castle”, “everyone wants to own their own home”, are frequent phrases bandied about and exploited by politicians.

The reality is that most people would like a fair choice, according to circumstances, of whether to rent or own. Younger people might prefer the flexibility of renting, whilst exploring life’s options, travelling, etc.; older people the greater security of ownership.

Unfortunately the current arrangement forces people, often the young, into ownership and heavy debt often beyond their means, simply because they cannot stomach experiences in the rental market.

So the aim should be to even out the game so that ownership and rental, despite their differences, are equally attractive, allowing a fair choice to be made.

Unfortunately both major political parties have no hesitation in turning a blind eye to property inflation simply to win votes from the ‘feel good’ factor. This irresponsible attitude was one of the root causes of the 2008 financial crisis that still reverberates.

So there is the need for some positive discrimination. This might include making rental payments tax allowable coupled with, for owner-occupier property, a sales tax on property completions to tax equity appreciation. None of these measures will prove popular but good government sometimes needs to make unpopular decisions.

 

 

 

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