The Coalition and private renting

The intersection of housing policy and benefits policy has become a focal point for political debate, and for tension within the Coalition government. Now that Tory MPs in marginal seats are starting to realise the electoral implications of a mass migration of poorer households into their constituencies perhaps there will be some movement away from the proposals. Self-interest may win the day where a concern for the welfare of the poor has little traction.

Much of the political concern has been over the changes in social rented housing, but the proposals will have equally profound implications for the private rented sector. It is worth pausing to reflect on how things are developing.

The driver of policy change is the size of the housing benefit bill in aggregate and the large payments made to some individual households. The government has been very effective in keeping those two observations linked: the overall housing benefit bill is large because households are getting a lot of (by implication “unjustifiable”) help from an overly generous system. Rather than, for the sake of argument, the overall bill being large because a very large number of individual households face much more modest housing benefit bills, many of which have increasing by a small amount. The media-stoked public indignation at the perceived over-generosity of the system has allowed the government to pursue this agenda without effective opposition.

The big distraction

The focus of attention so far has primarily been on the £400 per week cap on housing benefit and the implications this will have for the poor households, both unemployed and in low paid work, who receive more than £400 per week in housing benefit to sustain their current accommodation. This is an important issue, but it is going to be of limited significance outside London.

Extending the upper age limit of the single room rate from 26 to 35 years and tying the local housing allowance (LHA) to the 30% percentile of local rents, rather than the median rent, are likely to have negative implications for a much larger proportion of the private renting population across large swathes of the country. The 10% reduction in HB for job seekers who have been claiming for 12 months has the potential to create havoc, particularly in a recession when jobs are scarce.

The private rental market

In George Osborne and the capping of total benefit entitlement I commented that some of the benefit cuts proposed by the Coalition fail to demonstrate any real understanding of housing markets. It is worth expanding on this point.

The government seems to think that this policy change is simply curtailing the over-generosity of the current system while taking some of the froth off the market – and dealing with profiteering by landlords – thereby saving money from the public purse. It seems to be assumed that the change will not have any significant detrimental effect upon the supply of privately rented housing to low income households. This implies that landlords are largely insensitive to short term financial returns. That is certainly true of some landlords, but it isn’t a view that is borne out strongly by the evidence.

Changing the basis of the LHA will force tenants either to pay the shortfall out of their own pocket, move to cheaper accommodation, or renegotiate the rent downward. The former solution would save the tax payer money whilst sustaining the level of local rents and hence maintaining supply. It might well, of course, have significant implications for a household’s residual income and the affordability of their property. The latter two approaches would reduce prevailing rents at the bottom end of the market.

The conventional wisdom – backed up by some robust research evidence – is that most landlords are unwilling to negotiate rent downward simply because the current tenant has less money available. This is particularly the case where landlords are looking to earn their return from rental income rather than capital growth – which is likely to be the case at the moment – and where the landlord has recently purchased a property with a significant mortgage, and hence needs to maintain cashflow to service the loan. In areas of high demand the more likely landlord response is giving the tenant notice to quit and reletting at the current rent.

A counter argument is that accepting a few tens or a hundred pounds a week less in rent is better than allowing the property to stand empty. While that may be the case, it implies that the housing benefit sub-sector is somehow insulated from the rest of the private rented sector, which clearly isn’t the case. Landlords are able to switch out of the housing benefit sector. This will probably occur selectively in relation to quality, resulting in a reduction in average quality in the HB sub-sector. But clearly landlords couldn’t exit the HB sub-sector en masse in the short term unless local demand for private renting from working households rockets.

Equally, investment in private renting should not be seen in isolation from investment in other classes of asset. Those landlords who came into private renting searching for a return through capital growth are currently being frustrated in many areas of the country by declining real house prices. If the LHA change effectively caps the rent as well then that will make their investment appear even less financially attractive. They may not be able to sell in the short term without a capital loss, but there is no doubt a proportion of the landlord population will be on the lookout for opportunities to offload their property and switch their investment elsewhere.

No one really knows what would happen to the market if all tenants in a particular sub-sector suddenly become more income constrained at the same time. One possible outcome is that landlords’ expectations of acceptable returns are scaled back in proportion to the decline in available returns – and hence the supply of properties to households receiving the LHA is preserved. But I would suggest that it is at one end of the distribution of possibilities. More likely is a reduction in supply and/or quality as landlords bail out or seek to re-establish an ‘acceptable’ rate of return through disinvestment, respectively.

The idea that tenants will move to seek cheaper accommodation begs the question whether and where such accommodation is available. For families with children such mobility will disrupt education and established relationships with service providers. For all households it will disrupt social ties and diminish local social capital. It will undoubtedly have implications for public spending under other headings, to set against any savings in LHA. There will be significant environmental impacts as lower income working households are required to commute longer distances, at a time when the government is also allowing rail fares to increase more rapidly. Then the squeeze could really be on.

While individual families may be able to secure cheaper accommodation it is moot point whether substantial numbers of households will all be able to do so at the same time. If policy induces large-scale relocation then it is going to affect prices in receiving areas. Rents in the central London, for the sake of argument, may fall (although arguably it is just as likely that properties will be let to wealthier households at similar rents) but rents in outer London will rise because demand has increased. It is reasonable to expect the net impact on the housing benefit bill to be less than forecast.

Returning to regulation

If the current policy proposals are implemented then we are in for a turbulent time in the private rented sector. Historically downward pressure on rents has been followed by concerns about declining quality of accommodation – which is already poor relative to other tenures – and problems with eviction and exploitation of tenants. This raises the question of regulation.

In 2008 a series of reports on the regulation of the private rented sector were produced. Reviews by Julie Rugg and by Colin Jones were commissioned by the Department for Communities and Local Government. The Carsberg review was produced for the Royal Institution of Chartered Surveyors, and the Law Commission produced Encouraging Responsible Letting. All these reviews concluded that there was a case for an increase in regulation of the private rented sector, although the proposals for new regulatory structures differed. The Labour government backed the Rugg proposals for a national system of light-touch licensing and mandatory regulation of letting agents. But that agenda was overtaken by events.

One of the first acts of the new government’s housing minister was to indicate there would be no extension of regulation in the private rented sector. It was felt that there were enough rules and regulations already. This is true at one level – there are a lot of rules and regulations affecting private renting. But at another level it misses the big picture. The point made by the reviews –and the Law Commission in particular – is that there is a lot of law and regulation but most of it is ineffective.

At the top of the market consumers do not need to turn to the law because they typically have the financial and cultural capital to ensure that the properties they occupy are appropriately maintained and managed. If they need to go to law then they have the resources to pay privately for legal representation.

Those at the bottom of the market are unlikely to know their rights. Or have the confidence or incentive to enforce those rights when the landlord can evict them in a maximum of six months. While financial assistance is available through Legal Aid, the government is in the process of restricting its availability for housing cases. For many people it is simply easier to move than make a fuss. In areas of high demand for private renting there is little incentive for landlords to sharpen up their act if they can keep letting poor quality accommodation.

While the government has suggested that selective area-based licensing – as per the 2004 Housing Act – is sufficient to deal with the problems of poor quality accommodation, a more thorough-going approach to restructuring the regulation of private renting appears unlikely.

A liberal alternative

The Law Commission’s alternative proposal for the regulation of private renting was a system of enforced self-regulation. All landlords and letting agents should be required to join a trade association, and that association would be responsible for enforcing its members’ compliance with a code of conduct.

I have to acknowledge that I was part of the team that developed this proposal. But I would still argue that it is the right way to go. It recognises the complexity of the regulatory challenges in the private rented sector, is conscious of the limits on the state’s regulatory power, and is not prescriptive about which trade body a landlord should join. The proposal would encourage competition between trade associations to provide a good service to their members. Scrutiny of the trade associations would be a much more manageable task for the state than direct state regulation of private landlords, and keep the trade associations vigilant in enforcing their own code of conduct. In short, this represents one of the most liberal approaches to engaging with the private rented sector as it is possible to identify, short of letting the market rip. And I would argue there is nothing very liberal about letting the market rip.

Given the direction in which policy on pricing and financial support to private tenants appears to be heading, the issue of regulation – and the professionalization – of landlords really cannot be taken off the agenda. On the contrary, it is an issue of even greater urgency. Unless, that is, we are happy to abandon any concerns we might have about poorer citizens in twenty-first century Britain being forced to live in slum conditions. As far as I am concerned that would be an incivility too far, even in these desperate and dispiriting times.

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