Effect of Rent controls on Property Ecosystems of England, Wales and London?

October 31, 2017

We are starting to hear calls for Rent Controls from some political circles in the United Kingdom. So it seems appropriate to ask, what will this achieve?

There is a fundamental supply-demand imbalance in the UK property market, which is a key driver of the price of property. It is what makes it an attractive market for investors, but, at the same time, this doesn’t create a happy situation for outpriced buyers trying to get on the housing ladder, or tenants trying to find affordable accommodation. Particularly in London and the South East, with renters paying about 50% of earnings on accommodation costs, rising to up to 75% in London and about 30%* for the rest of the country.

UK Property EcosystemWe really need to address the entire ‘property ecosystem’ in the UK and not just seek a sticking plaster for one pressure point. There’s little point in plugging one hole in a leaking bucket, only to find another hole appears or just gets bigger.

In England there are antiquated planning processes, access to capital has become harder in some quarters and the costs of acquiring and running rented accommodation has got that much more as Government has piled on legislation, taxes and regulations. In short the government, is driving up the costs of rented accommodation.

How might Rent Controls alleviate UK housing issues?

The Private Rented Sector (PRS) has played a key part in the ‘property ecosystem’ by giving confidence to builders who know there will be a ready market for new build sales. The PRS has stimulated the supply of housing, with annual delivery reaching over 200,000 additional homes at its peak, given it accounts for around a fifth of new-build purchases.Δ

Historically Rent Controls have been tried in the UK, including the Rent Act of 1965 and 1977, which laid out a RPI-linked formula for rent increases. Following which, the PRS as a proportion of housing tenure decreased from 20% in 1971, to around 9% in 1986 only subsequently picking up on the back of the cumulative effect of a number of initiatives including: ending of rent controls with the Housing Act 1988, single household growth, the advent of Assured Shorthold Tenancy contracts, and receiving further stimulation with the introduction of buy-to-let mortgages late 1996/1997.

Consider also the effect of capping housing benefit levels in the UK in recent years. As a result of that policy, around two thirds of landlords no longer wish to take on benefit tenants and many are sceptical about the Universal Credit system, given it can often mean a landlord risks not getting paid rent at all.

Lessons from Berlin’s rental market?

Berlin introduced the Mietpreisbremse (‘capping of rents on re-letting’) in June 2015 which prescribed rental levels and rent increases. New rental contracts in some areas cannot be higher than 10% of the local average market rent and there are restrictions on how much rents can increase by, during a tenancy. This has been introduced to dampen rent levels which were experiencing increases of around 30% in some areas. Berlin’s population is increasing significantly, by around 50,000 new inhabitants a year and so there is a shortage of housing supply, so in many cases tenants are simply relieved to find somewhere to live and so don’t complain about rent levels.

In some respects it is a bit early to say whether this has stymied investment in the sector. There are questions over enforcement, meaning some active rental contracts may not fall within the Regulations. And there are ways of not being subject to the Mietpreisbremse. For example if a home is let for only a limited period of time, or in some instances if it is furnished accommodation. Furniture can justify a rental surcharge and there is no real fixed guidance on this, nor the amount and quality of the furniture. An apartment can be considered partly-furnished if there is a fitted kitchen. New builds and refurbished buildings can also fall outside the regulations.

Given the overall nature of the Berlin market, rental yields are low single digits, so property investors are predominantly attracted by capital growth rather than yield or cashflow.

But let’s also remember, there is a more flexible supply on tap in Germany. There is also a more stable political backdrop with a steady coalition government, lacking short-term, surprise tactical, policies. So investors know that the property landscape parameters are not going to change every few years.

The German government also incentivises – rather than just using coercion – so there are tax incentives for example for bringing run-down or disused properties to market. This is not present in the UK.

In the UK landlords are responsible for property repairs and bear the costs of voids. In Berlin tenants stay on a long term basis, with some even fitting out their apartments with kitchens and so landlords do not have the same voids and associated costs.

What is the likely outcome for the UK’s PRS?

There is a real and present danger that such a policy will again reduce housing stock in the PRS, by driving out professional landlords who want to make a living out of housing provision.

Those who persist as landlords may be less likely to keep properties in good working order, as it discourages investment and maintenance. Or there may well be landlords who seek to find a way around rental regulation or loopholes.

Mortgage lenders may also be reluctant to finance, thus making access to capital harder.

Calls for rent controls, may be headline grabbers, but as one route to making a livelihood is plugged, another pops up. Just as we are seeing with the latest escalating property ‘leasehold’ issues, as builders try to create new ways to make profits. And rental controls in other cities like Berlin, do not seem to be having the desired effect.

Conclusion about UK rent control

A sensible and sustainable way to deliver lower rents across a broad spectrum is to make it easier and cheaper for landlords to bring rental accommodation to the market, which means addressing; supply, the cost of rental regulation and taxes in tandem.

NB * ONS 2016/House of Commons briefing paper, Δ HM Treasury

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