The private rental market is out of control. Here's how to fix it.
Posted on February 12th, 2015
Last week the Coalition announced its plans to help tackle revenge evictions and substandard housing in the private rental sector.
Although any new legislation in this area is a step in the right direction, the Government's plans don't go nearly far enough.
One of the first red flags was in the title of the legislation itself, which is called the Deregulation Bill.
But tucked away amongst other remarks as the Communities Minister, Stephen Williams, talked up the reforms was something quite alarming. The Lib Dem MP (whose Bristol West seat is being strongly contested by Darren Hall for the Green Party in May) said that the Government is determined to create a "bigger, better private rented sector."
Let's just take a minute to contemplate this.
In a week where Generation Rent published figures showing that UK landlords make more money each year than the entire Moroccan economy, the Coalition thinks part of the solution to fix our broken housing system is to expand the private rental market.
Private landlords already own around 5 million houses in the UK, accounting for roughly 1 in 5 houses in total. Housing shortages and spiralling property prices have enabled these landlords to earn an estimated £77billion a year in rents and capital gains.
Are we seriously saying that the solution to the housing crisis is to make this market bigger?
The false economics of the private rental sector
It's about time that people started to seriously scrutinise the private rental market.
Theoretically, the growth of this sector in recent years has contributed to our economic "recovery" since all capital gains (i.e. rising housing prices) are deemed to contribute to our country's net wealth in GDP terms.
But what does this sector actually contribute to our economy?
It has zero enterprise value. It doesn't really create jobs. It doesn't even generate as much tax revenue as it should because most landlords know their way around the tax system and only a small portion of capital gains are ever taxed.
The vast majority of landlords don't actually build the houses they let, so we can't really say that they are helping to solve the housing shortage either. In fact, many people quite reasonably point out that there wouldn't even be a housing shortage if it wasn't for these individuals buying up and hoarding the houses we already have.
Of course, for one reason or another, there will always be some people who are not in a position to own their own house. But that's where the social housing system should kick in, or at the very least a well regulated and fair private rental market. The idea that it is right and proper for there to be a deregulated multi-billion pound industry thriving out of people's basic need for housing is just plain wrong. We must challenge this idea.
Even capitalism's founding father, Adam Smith, recognised that landlords contribute little of real value to the economy, seeing rents as an essentially exploitative concept:
"As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed..."
But we aren't just talking about abstract concepts like inequality and exploitation here. The life of a private tenant can be a downtrodden existence of unfair letting fees, annual rent hikes and pushy landlords with no concept of the the term 'exclusive possession.' Because market forces are continually working against renters and in favour of landlords and their agents, tenants are too often left feeling exposed and vulnerable.
The problems within this sector are systemic and can't be fixed with a bit of window dressing legislation.
The Government's current position however is almost perfectly aligned with the position of industry bodies, which is to "clean up" the sector by taking a stand against the worst landlords. While this in itself is a good thing, it also creates a smokescreen by suggesting that problems within the sector are caused by a few bad apples when in fact the problems go much deeper than that.
Making the sector "bigger and better" is not what's needed.
Legislating for change
There are a number of things that can be done to make the private rental market work more effectively:
- The Landlord Tax
This type of fiscal policy gets my seal of approval as there would be numerous foreseeable benefits.
First, the tax revenue could be ringfenced and used to directly fund the building of more social and affordable housing. This way private landlords would not just be making an already broken system worse: they would actually become part of the solution.
Second, it would help to destroy the notion of property ownership as a "get rich quick" scheme. At the moment it's just too easy to make a quick buck off housing with few commercial risks involved. We need a strong disincentive to stop people exploiting weaknesses in the market for personal gain at the expense of the next generation's housing needs. Who knows, people might actually start investing their money in something enterprising that benefits the wider economy instead.
Third, it would make many buy-to-let mortgages unworkable as the margins would become too tight. This would make it harder for people to debt leverage the acquisition of homes and stop amateur landlords who can't really afford to own multiple homes from dabbling in the market.
Fourth, it would redress the imbalance with the rest of the economy. How can it be right that a small business has to pay business rates on top of corporation tax and numerous other overheads, while landlords don't? We should be rewarding enterprising businesses that employ people and contribute to our society, not the wealth accumulators.
- Rent control
Rent controls will stop landlords from doing this either by pegging rent increases to local rental indexes or setting a percentage cap.
Far from being a "Venezuelan" concept as Grant Schapps once claimed, this is in fact the system that is employed quite successfully in other market economies like Germany and Canada.
- Regulation
The relationship between a landlord and tenant ought to be one of utmost trust underpinned with regulation on a par with that governing doctor-patient and solicitor-client relationships.
The Landlord Tenant Act gives tenants a certain amount of protection in law, but the problem is that this is just a piece of legislation. Tenants have to go to court to enforce it, which is expensive and impractical. The Property Ombundsman Service lacks sufficient bite to keep the industry in check.
I can think of two alternative ways of improving regulation of this sector.
One would be to "professionalise" the industry, by requiring landlords to register like solicitors, accountants and doctors with a professional body (let's call it the Landlords Conduct Authority, or LCA). Registration with the LCA would be mandatory with harsh fines for failing to register.
Landlords would then have to adhere to a strict regulatory code of practice, with tenants able to refer complaints directly to the LCA for investigation. The professional body would then be empowered to sanction and even "strike off" landlords who violate the code.
A second option would be to have a full blown statutory regulator for the private rental sector. This would regulate not just the quality of private housing and conduct of landlords (as above), but could also ensure that rent controls are enforced. It would operate along the lines of other modern regulators such as the Competition and Markets Authority and Financial Conduct Authority, both of which are empowered to issue "civil penalties" (i.e. fines) to people or companies that break the law. Civil penalties are much more timely and cost effective than having to prosecute offenders.
A regulator with real teeth would have a profound impact on the behaviour of landlords. Things like revenge evictions and ridiculous powerplays over security deposits would become a thing of the past as the power dynamics shift back towards the centre.
Any landlord who baulks at the idea of being directly regulated needs to take a look around them and realise how good they have it.
Why should they be able to profit from a basic human need like housing without being subject to a robust regulatory regime? For example, private providers of other basic needs such as energy (Ofcom) and healthcare (the General Medical Council, The Care Quality Commission etc.) are directly regulated by statutory bodies. There's no reason why private housing providers should be any different.
To top it all off, social housing providers are directly regulated by the Homes and Communities Agency, but private landlords aren't. This is an absurd situation.
In conclusion...
We need to deal with this alarming imbalance in the economy before we lose control of the housing market in Britain for good.
At present, our bloated private rental sector means that just under 5% of the population own almost 1 in 5 of our houses.
Worryingly, according to Government estimates that number will continue to grow so that by 2032, over 1 in 3 people will be renting from private landlords.
Action is required immediately to prevent the likely serious impact this will have on the social fabric of the country.
If we are going to end up becoming a nation of renters like Germany, then we should at least make sure the market works well for everyone, not just the landowners.
But if this is to happen, like other countries, we also need to continue to build a strong and vocal bloc of voters to hold the industry to account and lobby for real change.
