Private Renting Redux

by Ken Gibb

This post follows three different rental market developments in the last few weeks. First of all, I chaired Professor Peter Kemp speaking in a seminar reflecting on Scottish market renting and PRS policy from the remove of England (though he is a former colleague of mine in Glasgow). Peter was joined by an excellent panel of  Rosemary Brotchie, Nick Bailey, Susan Aktemel and Anna Evans. Second, the Scottish Government published online their instructions for landlords and tenants regarding the new private rental tenancy that will come into effect for new tenancies in December 2017. This will assume tenancies are ongoing unless specific mandated conditions for termination are met (and are verifiable). It also creates the right for councils to seek local pressured rent zone status which would allow them to seek caps on annual rent increases (though not on initial contract rents. Third, my new colleague in the Collaborative Centre for Housing Evidence, Tom Moore, has recently published an (currently) open access paper in the International Journal of Housing Policy contrasting regulation and rental policy for the PRS in each of the UK’s four nations.

Tom’s policy review paper does the interested reader a great service by laying out the background context and policy divergence across the UK in terms of tenure security, regulation and affordability. While all four nations have experienced considerable growth in private renting since devolution, there are both common and distinct trends across the home nations. While traditionally a sector of transition, more people are living longer in the sector and more families and other longer term household structures are opting for the rental market. A key question is the contribution of either lack of choice forcing people into the sector or whether the sector is a destination of choice (perhaps this also suggests the weakness of the use of the word ‘choice’). Tom stresses that not only are tenure rights and regulation very different across the UK (with England as the default most deregulated n most regards), none of the UK nations approach the levels of protection and regulation found across much of the continental Europe.

Moore stresses that to the extent that more low income households are now in the sector, their vulnerability may exacerbate inequalities and disadvantage. Second, he rightly emphasises the importance of greater tenure security in policy discussions as the sector grows in importance. Third, management practices by some landlords remain a cause for concern.

There is much to like in this paper especially the comparative analysis of divergence across the four nations. If I was being picky I would challenge a few points: Scotland does have limited policy control over housing-related aspects of the housing elements of universal credit and discretionary housing payments. They can also top up and create new benefits – but they have to pay for them out of their budget. Second, I think the paper downplays important UK level ‘reforms’ of the sector, particularly via HM Treasury (the Scottish Government chose to follow the 3% uplift in stamp duty via the devolved Land Building Transactions tax).  I am also one of those people sceptical about rent regulation and in particular the ability of people like the rent officer to find a balance between tenant and landlord interests. Scotland’s reforms will be an important natural experiment for Scotland and the rest of the UK.

The Glasgow seminar with Peter Kemp was both stimulating and challenging. Peter made many important points. First of all, he noted that there is a definite asymmetry in terms of the new Scottish tenancy in that it is considerably easier for a tenant to leave under the new settlement than it is for a landlord to end a tenancy. Second, he stressed that the likely cap on rent increases is likely to be CPI plus 1% – which, compared to the Scottish average rents as described as ONS is actually quite high (unaffordable areas excepting).

While there was some concern in the seminar about policing the landlord grounds for repossession of property, there is clearly much anticipation about the impact the new tenancies will have for Scottish housing.  There was also a focus on other concerns of the moment like short term tenancies and Air BnB.

For me, Peter’s most insightful comments concern the changes to the tax regime for private landlords. Until listening to Peter I had generally considered these to be a tax grab that was rather unthinking about its housing system consequences (ie reducing the supply of lets just when the rest of the market is difficult to access, possibly pushing rents up). That may be true but I interpreted what Peter said as a sort of blindside attack on individual ‘mum and dad’ landlords in favour of the corporates – not by subsidising them (although there is some of that going on  via guarantees, etc.) but by using the tax system to penalise small landlords. (who make up 90% of the supply side)

How so? First, they do this by charging an 8% surcharge on capital gains tax compared to other assets. Second, there is the 3% surcharge on the tax on buying properties if you are a landlord (which may help potential first time buyers but might just push rents up or broadly discourage investment). Third, mortgage tax relief has been cut to the basic rate (unlike for other forms of investment business loans) and this is also has been turned into a tax credit which essentially means that rather being applied to corporation tax, it is now really a turnover tax and this has the unintended (?) consequence of pushing many small-scale landlords into higher tax bracket. There is concern in the sector that will lead to a large scale departure of small scale landlords. Will this gap be closed by other providers? Will first time buyers fill the gap as properties come onto the market – perhaps to an extent but they still face high deposits even if prices weaken.

This highly dynamic sector is the fulcrum of the housing system and its segments and interdependencies remain comparatively poorly understood and recorded. This has to change. And now social landlords are increasing their interest in and provision of mid-market rent – slightly sub market rents on short tenancies aimed at key workers (though this will also have to change for new tenancies after December in Scotland). How will this new sector niche perform and will it impact on the quality of the traditional private offer (and indeed how will it impact on social tenancies also provided by the same landlord)? Peter made much of the growth of the sector but did point out that it started from an incredibly low base in the 1980s – perhaps is the real international comparison to note-  just how did the UK end up with such an infeasibly small sector, something which of itself creates much deeper inflexibilities in the wider housing system?

 

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