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
— Daniel Knowles (@dlknowles) May 1, 2014
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.