It is a truth universally acknowledged that the rent is Too Damn High. And for many of us it rises every year. So when the property industry reacts to any government policy that might disadvantage landlords with warnings that “it will only increase rents”, the threat rings hollow.
Economic theory also tells us to be wary of such predictions: the rent is set by supply and demand in the housing market. Landlords already charge as much as they can get away with.
If a landlord pays an extra 3 per cent in stamp duty when she buys a house – a surcharge that was introduced in April 2016 – she can’t simply charge 3 per cent more than the market rent because other landlords in the market will undercut her. Similarly, if a debt-laden landlord sees his mortgage interest tax relief cut, he can’t pass that on to the tenant – because most landlords have no mortgage, won’t be affected by tax changes, and will take his business.
So if a landlord is already charging what the market can bear and still can’t make the numbers work, they will have to leave the market. Cue the second threat. “With fewer rented homes, where will renters live?”, the estate agents cry.
But in quitting the market, landlords don’t, as a rule, destroy the house they have been letting out. They sell it, either to a landlord or an owner occupier.
If a landlord buys it, great: no problem for renters there, eespecially if they can stay put. If an owner occupier buys it, great – either they are first-time buyers themselves, or their chain is freeing up a home for a first-time buyer (or possibly a landlord; see first scenario). More first-time buyers mean fewer people demanding rental properties. Even as home owners they would still be financially stretched and trying to make as much use of space as possible. So there is no change to the balance of supply and demand. Because households can change tenure, supply and demand in the rental market is intimately connected with supply and demand in the housing market as a whole.
Since George Osborne introduced his tax changes, we’ve seen first-time buyer numbers rise, and the size of the private rented sector shrink by 111,000 – the result of fewer landlords buying property, and more landlords selling up. We decided to see if this had affected rents.
Tenure shift explained. Click to expand. Image: Generation Rent.
In cash terms they are still rising in most parts of the country, but at a slower rate than before the tax changes. In London they’ve been falling. But, like prices in the wider economy, rising rents is par for the course – so we looked at how they behaved in relation to prices in the wider economy, i.e. in real terms.
If the property industry is right, inflation-adjusted rents would have risen as the private rented sector shrunk. If economic theory is right, they would be unchanged. In fact they fell, by 3.2 per cent.
Something similar happened ten years ago. Instead of a drop in supply of rented properties, there was a surge in demand after mortgage lending for first-time buyers dried up. But rents didn’t rise: they fell, by 6.7 per cent in real terms. That was, of course, around the time of the recession. Short of a revolution in building rates, tenants’ spending power appears to be the biggest factor determining what landlords can charge.
Real rents over time. Click to expand. Image: Generation Rent.
The lesson in all this is that the government should press on with legislation to raise standards within the rental market, particularly ending Section 21 of the 1988 Housing Act to provide greater security of tenure. Landlords whose speculative or exploitative business models rely on that ability to evict tenants without a reason might well quit – but their competitors, who value and crave long term tenants, will do just fine.
To ease what exodus there is, the government has a duty to help the tenants who aren’t in a position to buy the house themselves. Any tenant who is evicted having done nothing wrong should get compensation – three months’ rent would be reasonable. That would both give them the means to find a new home, and incentivise landlords to sell tenanted properties to other landlords in the first place.
There’s no question that rents still need to come down significantly, but building enough will take years. In the meantime the government should ensure that renters get a better deal for what they pay for: a secure home.
Dan Wilson Craw is director of Generation Rent.