Ahead of tonight’s General Election, the state of the UK’s private rented sector is proving to be one of the most polarising topics, with each major political party setting out ambitious plans to make housing more accessible.
For landlords, rent controls and longer tenancies are certainly topics that are going to be high on their agenda when considering which political party to vote for.
So who wants rent controls and why?
Labour and the Green Party have included rent control policies in their manifestos. Specifically, the Green Party have said that they would create a living rent commission which would look at rent control policies currently and previously in use around the world, to see if they would work in the UK. This would focus on how effective they would be at not only stabilising rent but also bringing the cost of renting down long term. Their long term aim is to reduce rent to being a third of the tenant’s income, and to cap increases in rent during a contract.
Labour’s approach to rent controls allows only a little more freedom to the landlord. Labour has said they would create legislation that would obligate landlords to provide three year tenancy contracts, and prevent any rent increases beyond the rate of inflation during that tenancy. However, landlords would be free to increase rents at their leisure between tenancies. For this reason, Labour’s policies are better described as being longer-term fixed-price contracts.
Both the Liberal Democrats and UKIP support longer tenancies, but would not legislate rent controls – only encourage landlords to self-regulate by putting a provision for rent increases in line with inflation into their tenancy contracts.
The Conservatives have openly opposed blanket rent controls, instead focussing their efforts on encouraging good quality landlords into the marketplace to create greater competition and reduce demand.
One form of rent control was used in Britain between 1915 and 1989 and is associated with the collapse of the private rented sector during those times. In fact, according to Ryan Bourne, Head of Public Policy at the Institute of Economic Affairs and columnist for City AM, ‘95 per cent of economists disagreed with the proposition that rent controls had a positive impact on the amount and quality of broadly affordable rental housing’.
How would they impact landlords?
The biggest concern for landlords is that rent controls could mean that their profit margins are squeezed, especially if their running costs or mortgage interest rates increase. In turn, this could have notable effects on the buy-to-let market.
Firstly, rent controls could deter investment in buy-to-let properties which is sorely needed, thereby reducing supply and increasing demand, potentially making it even more difficult for tenants to find a property.
Secondly, it could mean that there are fewer funds available to improve the quality of their portfolio, therefore not meeting minimum standards.
Are rent controls justified?
The glaring issue with the proposed rent controls is that, as Ryan Bourne mentions, ‘this sort of rent control does nothing to improve affordability’. He goes on to suggest that it could even increase market rents.
Take the following example - currently, rents are determined by supply and demand, and at the moment, the housing shortage means that demand is high. This is especially true in London, where 13 people competefor every rental property on average.
Rents rose at a marginally faster rate than inflation in the 12 months to March 2015 – a 2.1% rise in private rental prices compared to 0.0% change in CPI inflation. But this is a figure that is largely driven by a select few areas.
So, while rent controls are designed to appeal to ‘Generation Rent’ and restrict rent increases, they could in fact have the opposite effect.
Over the past five years, not all regions have seen a rent increase above the rate of inflation. If such policies are implemented, then it could actually see all landlords raise their rents at such a rate, when some of themmay not have intended to anyway.
And, while the controls could be advantageous for long term tenants, who would have the extra security of knowing their rents could not be suddenly increased during their tenancy, they could also come at a substantial cost – reduced economic efficiency, the creation of negative incentives for landlords and tenants, and at the expense of ‘outsiders’ to the rental property market.
Such interventionist policies aren’t likely to have a significant effect on affordability, at least not in a positive way, which is the key issue of contention in the private rented sector. Instead, shareholders may consider the interference will be detrimental to the business profits, and decide to start selling as a consequence. The private rented sector, by its very nature, cannot be considered a public service, and just like any business, landlords should be free to set their own prices for the service that they provide.
Positive changes to the property market which will benefit tenants, landlords and first time buyers alike are more likely to come from schemes such as Help to Buy and increased house building/relaxation of planning rules which stimulates economic growth.
The best alternative option therefore, is to balance supply and demand in the sector. This requires two things to happen. Firstly, buy-to-let investment must be encouraged to increase supply, and secondly, they must be stimulated, and even incentivised, to create high quality accommodation, thus increasing healthy competition amongst landlords.
In fact, there could be a better solution to the problem of unaffordable rents, which especially prevent young people from moving out of the family home. Offering a more affordable, sociable way of living, HMOs (Houses in Multiple Occupation) are becoming an increasingly popular option for young working professionals; research from Spareroom has shown a 33% increase in the amount of people seeking out this type of accommodation. They also make much better use of the existing housing stock at a time when the development of new homes struggles to keep pace.
