Labour and Rent: Demands and Supply.

Ed Miliband today announced Labour’s policy on improving the private rented sector. It included three main planks: a shift to three year tenancies for tenants (with a probationary period, plus exceptions for Landlords who wish to sell the property and tenants who wish a shorter commitment), rent increases limited within tenancies by a preset formula, plus a ban on tenants being charged fees by letting agents.

As I’ve written about this sort of thing before, I’ve been hailed as making a good case against the new policy of my party

Oh, well! I suppose I better look at what the actual policy is, though, and see if I’m agin it.

The first thing to note about this policy is what it is not. It is not, as Grant Shapps ludicrously alleged, a policy of Venezualan style price fixing. There is a certain tendency in the Labour party to applaud any market reform as the greatest advance for socialism since the October revolution, perhaps because technocratic regulatory tinkering feels insufficiently brave and radical to our radical souls.

Equally, there is a tendency in the Conservative party to decry any Labour policy in the same terms, even when, as Emma Reynolds points out, the government itself supports creating longer tenancies. That point should remind us that both parties recognise that the rental market is not working well for everyone, and reform is widely acknowledged as needed.

The question of what reform to pursue is trickier.

As I’ve argued before, correctly diagnosing the problem is important.

The (imperfect) data we have suggests that rents are actually falling in real terms. Labour’s own press release suggest average rents have risen by 13% since 2010, which sounds a lot, until you realise that’s over four years. Last week, the ONS suggested private rents are increasing about one per cent a year.

For a lot of people that data is counter-intuitive. While there are valid questions about data sets, I suspect that some of the personal-data divergence is due to tenants who move regularly being most exposed to rent increases. Landlords have an incentive to keep existing tenants in situ, because vacancy reduces income, and you have to pay to let the property, so it’s quite possible that while mobile tenants in high demand areas are witnessing big increases, but there are other tenants whose rents are effectively falling year on year.

This may be wrong, but even if it is, a precise diagnosis of the problem should influence our assessment of proposed solutions.

If the scenario I sketch is correct, then limiting rent increases for existing tenants will only impact at the margins. Landlords are generally not raising rents on existing tenants now, so shouldn’t mind too much the prospect of not doing so in future.

Yet marginal doesn’t mean unimportant. The defining moments of our lives are lived in our experience of marginal cases, in the fine lines between success and failure.  Politics shouldn’t ever think change here is insignificant or unimportant.

So lets look at the margins.

On the positive side, such a control will prevent those rent hikes that do occur and might control rents in more high demand areas leading to less ‘hotspots’.

Then again under Labour’s plans, tenants could be evicted for breach of contract. If there were longer term tenancies but no price cap, Landlords could just jack up the rent until the tenant left.

With long term tenancies and a price cap, they could introduce very detailed contracts, and enforce them very tightly. Don’t clean your windows often enough? Out you go! However, this would offer tenants protection – it would be a hassle for Landlords to do this, so they would likely only do so if the potential rewards were great.

More negatively,  a cap on current rents could expose landlords to a sharp rise in interest rates, which if they were not able to pass on could lead them to being forced to sell at a bad moment for both them and their tenants.

However, if the rent rises allowed were large enough to anticipate shocks, then you’d probably be able to increase rents quite substantially anyway. this might lead some marginal landlords to decide it’s not worth the risk and sell rather than let their properties. Though I expect many would just fix their mortgage, and pass the higher cost on earlier in the tenancy.

As for the proposal to ban charges by letting agents, I think it’s a good idea, though probably not for the reasons most people do (often presented as ‘letting agents are horrible dicks who scalp at every turn’)

I like reducing fees because upfront charges are horribly lumpy, and as most of us don’t have a lot of spare cash, finding a deposit, rent, paying for moving costs and so on is a substantial burden. If you reduce extra costs like upfront charges, then while the cost will almost certainly be passed on in other ways, the burden will be far smoother over time. If lettings agencies increase their fees by five per cent, and landlords pass that on, you might see a one off increase in rents, but the cost of moving will be lower each time. For the young and mobile, that’s a gain. If our economy is pretty mobile, and we want workers to be too, then smoothing people’s costs is welcome.

Accepting that such charges will likely get passed should remind us that if profits are high then passing on of charges happens only when demand exceeds supply.

So ultimately, this is a problem of supply, not of demand, or even of regulation.

Labour recognises this and seek to build more housing, but as Shelter’s report points out today, building the level of new homes we need comes at a significant cost. I think they says an extra billion and a quarter a year. That’s not impossible money, but it has to come from somewhere, and to keep it that low requires some pretty nifty footwork.

Will Labour’s policy work?

Well, given I don’t see the surge in rental costs it’s intended to prevent, I’m not sure the rental problem is the one presented in the press releases.

Instead, I think it’s a sharper problem for a more specific group of young, mobile renters. Longer tenancies and better security are clearly welcome for many of these, and if the annual rent increase allowed is set right it shouldn’t have negative consequences for Landlords, or lead, except at the extremes to contractual fiddling to get tenants out.

It might also encourage the formation of larger, more professional landlords who can reduce their cost base and manage rate exposures without increasing rents.

However, it might lead to a problem if there is an interest rate shock, and there is the possibility it will reduce the pool of private landlords, especially at the lower end.

More importantly perhaps, the limited nature of these reforms, and the complexity of assessing their consequences should remind us is that however good your intentions, a problem of demand and supply can’t really be fixed by trying to regulate where the two curves should intersect. 

Far better for the state to intervene to impact where they do intersect.

That takes us back, as ever, to the need to build, and for the moment at least, to make sure we don’t do too much that might lead to landlords removing their properties from the rental market and selling them to those who can afford to buy now.

After all, the one short term problem we could really do without is a whole bunch of people who can’t afford to buy, and then discover there’s nowhere to rent. Ultimately, until will build, any regulatory solution is eventually going to hit that problem.

8 Responses to “Labour and Rent: Demands and Supply.”

  1. Luke

    You seem keen to protect landlords from an increase in interest rates. I don’t see why.

    Say L gets £100 pw on a property worth £100,000. As interest rates go from, say 3% to 5%, the property declines in value to, say, £90,000. Why should L be able to charge £110 to rent out something now worth less? (I accept L might get to keep £100pw on a property now worth only £95k, as interest rates have gone up, so returns might do too.)

    (The figures given are just for illustration – I have no idea if they’ re realistic.)

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  2. Salientwork

    This is all good debating stuff around a welcome policy announcement in principle. I think though you may want to consider demand as well as supply. If the rental market was more “managed” and predictable – as proposed here – Insuspect more people would enter the rental market from living with parents etc. (Fully accept that can’t be proven without a pilot though). Secondly – and more importantly – there will be downward drivers on the HB bill. Which is the big prize in all this. Though again a parallel reform of social housing rents would be needed too. Views?

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  3. Gregg

    The proposal doesn’t go as far as I’d like (or as far as is really needed), but it’s certainly a step in the right direction – and it would be the first step on delivering one of the recommendations of that Shelter report. Rents have been too high for a long time, but a wider problem is that rental growth has fuelled house-pricing through the buy-to-let market. The process of existing home-owners leveraging their property to acquire property for rental has reduced the supply of owner-occupied housing (and priced people out of the market), and fuelled both the last and the current speculative housing bubbles – and that has been a major factor in speculative land-banking, massively increasing the amount of land that has residential planning permission but isn’t being built on. Both peaks and troughs seem to discourage building – because peaks hold out the promise of even greater returns in the future, and troughs mean potential losses; rent controls should help stabilise the housing market, and a more stable market should in turn incentivise home-building – as the Shelter report discusses.

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  4. David

    @Luke – you’re fundamental error is to confuse the sale value and the rental value. Supply and demand for rentals and sales are different – perfectly conceivable that rents go up whilst sale prices are falling.

    For example, if interest rates rise, demand for purchase of property falls. There are therefore more renters for the same pool of rental property. Rental prices rise.

    I’m also not convinced on the correlation between rate rises and property price falls – observe the last recession.

    I suspect the upfront cost change will merely lead to a rise in charges – for longer tenacies likely to be overall negative for renters as suspect landlords / agents will want to ensure they make their money over how long they expect (say 18m to 2yr as opposed to the legal tenor).

    There will be problems with implementing this policy – hte indexation idea sounds simple but will be complicated to implement for Hopi’s reasons amongst others. Other issues how do you legislate to stop landlords terminating? The press release suggests exemptions – any unscrupulous landlord will explot that loophole to be able to get out a low-yielding tenant. There also seems to be the scope for unintended consequences

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  5. Ian

    I am sort of 50:50 on the proposal, which is probably to say it isn’t too bad by the standards of most political proposals.

    One area which is often sadly overlooked, and really needs some reform as for people at the bottom end of the market it’s often the biggest barrier to moving is the deposit issue.

    I would like to see some sort of mandate that deposits need to be refunded much sooner than they often are — and in a perfect world, a method whereby the tenant is able to transfer a deposit from one tenancy to another automatically.

    It’s often expensive enough moving without having to stump up a grand or more in advance as a deposit and rent on the new home, and then wait weeks (or worse) for the old landlord to refund their deposit.

    Many people simply don’t have that sort of upfront cash to hand, are effectively locked into a tenancy with rising rents.

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  6. SpinningHugo (@SpinningHugo)

    I think it is daft, because it will distort the market, and sometimes benefit those who don’t need it (plenty of rich tenants).

    If we took seriously the prohibition on above market increases that would be expensive to enforce. Which means we wont take it seriously.

    It does however form part of an interesting pattern with the moves on the energy cap, and the inducements for employers to pay the ‘living wage’.

    These are all examples of predistribution, trying to help the poorest without actually spending any money.

    For myself, I think predistribution is a crock of crap, distorting the market and not necessarily benefiting those you want it to, and we should be helping the poorest by some good old fashioned New Labour re-distribution (giving poor people money).

    But perhaps, being as generous as I can be, we should not let the best be the enemy of the good.

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  7. londonlandlord

    It seems to me that Labour are behind the curve on this issue from my personal experience(and from many others I know) I have found that it makes better economic sense to have long term tenants for two years rather than new tenants every six months.
    The reason simply is that every time you get a new tenant you are paying agency set up costs, tenant reference costs, professional cleaning, inventory costs. In addition you need to spend more time answering questions from the new tenant and going round there to make sure everything is ok. those latter costs can easily escalate to two or three weeks rent let alone the cost of your time. So why wouldn’t I want longer contracts.

    Furthermore, most of the new tenants who want to move in want to sign long term contracts but will do so on the basis of reducing the weekly rent as they feel they are offering the security to you.

    What does concern me is the high number of buy to let buyers entering the London market buying at relatively high prices with expectations that the rental yields will remain the same or go higher. If you flood the market with additional rental properties rents will go down as there is more choice. In addition the people who have been renting for the last three or four years waiting to buy may also have purchased. The question is who is coming up behind them who has a reasonable disposable salary who can afford the rent? Who is going to fill that gap with more rental properties available and possibly less prospective tenants? You might find that the landlord will only be to happy to sign a three year contract for the security but the tenant might not be so happy if after year one he realises that rents have gone down and he is now paying too much.

    Hopi I think is right about the tenants who perhaps suffer the most are the ones who tend to be highly mobile and perhaps low paid, with poor job security and who have limited housing options. If Labour is hoping that there policy can help this group the most I am not sure.
    Would they really want to sign a contract for three years if they are so mobile? What if they want to improve their prospects and move elsewhere? Or if they lose their job or have a relationship breakdown. They may need to end the contract before the three years is up and will therefore be liable for the rent for the balance of the contract. It may provide security but it can also act as a millstone to mobility and opportunity.

    It seems to me that Labour are trying get the landlords to shoulder greater risk in that sector. You might find that
    landlords might not feel that the potential risk is really worth the candle.

    There will always be good landlords,tenants and agents equally there will always be bad ones. I am not convinced that government interference in the private housing market would ever achieve the fairness they desire.
    What really needs to happen is for there to be more public affordable housing built in urban areas.

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