Dry But Important – The 2015 Election Policy Battle
We can’t deny that articles about rental policy are dry (cue jokes about curing insomnia) but they are important as the Private Rental Sector (PRS) is growing. The May 2015 election is looming and politicians are jockeying for votes. We summarise below some of the main issues, along with our views.
Compulsory 3 year tenancies
The Labour Party is proposing that a tenant will have the mandatory right to live in a property for three years, only having to give notice of two months at any time. The landlord will be able to sell the property or move back into it during the three years, but will not be able to ask the tenant to leave otherwise, unless the tenancy is breached. This is a huge change, leading to the tenant becoming superior to the landlord. Currently they are equal – both parties need to agree terms or a tenancy will not go ahead and both sides are protected with vast tracts of law. The new proposals move towards a more French and German way of renting but without the structural change required to make it fair for the landlord. For example, in Germany rents are closely controlled and tenancies are generally for 10 years, but the quid pro quo for the landlord is far lower costs as tenants tend to provide white goods, furnish the property and often install their own kitchens. The Conservatives have said they support ‘longer tenancies in general’ but have yet to publish details.
We understand that longer tenancies will be attractive to many landlords, but we argue that making tenants superior to landlords is a dangerous game. It risks alienating some of the ‘homeowner’ landlords who are only letting their property for a year while away on work and one unintended consequence could be that more property is left empty if owners are scared of a tenant staying for three years. Empty property is the last thing the UK needs.
The context is that you can already have three year tenancies today – just execute the agreement as a deed if both parties agree. Of course this “parity of agreement” would be deleted under the new proposals.
A second point is that if the tenant can give two months notice at any time, then more property will come up for re-letting at weaker times of year and landlords will suffer as lower rents are achieved in quieter times. The Oxfordshire market is pretty seasonal with more demand in the summer than the winter, and so it would be better if tenancies were fixed term and not periodic.
In May this year, Ed Miliband announced that limiting the amount by which rents may increase during tenancies would be one of his key policies (it will not affect the setting of rents when a property is re-marketed). This gained a great deal of publicity as ‘rent capping’ has a poor track record in England and thus people are sensitive to the concept of interfering in the free market. The actual policy – limiting rent increases during a tenancy – is fairly sound. We already use CPI and RPI for rent increases during a tenancy and it works well. The problem is one of perception: the concept of market interference strikes horror into many people and the risk is that both individual and institutional investors will be deterred from being more active in the PRS.
Banning agents fees to tenants
There is much talk about a desire to ban letting agents from charging any fees to tenants. It is driven by a shortage in new social housing over the past 20 years, which has pushed disadvantaged and lower income groups into the PRS. The PRS is charged with doing a job it is not built for – providing social housing – and some agents are charging high application fees to people who cannot afford them. The banning of all tenants fees has become, in our view, the sledgehammer to crack the nut.
There is a common sense solution which is to cap, not ban, fees. We have written to ARLA to propose this solution. We have also introduced a transparent ‘Payment Calculator’ on all our properties, see www.finders.co.uk and click into any property in the ‘Search’ area. The current Government has pushed through the new Consumer Rights Bill which later this year will demand that estate and letting agents publish their fees transparently.
Banning tenant fees would transform the industry, in our view for the worse. The three biggest complaints about the PRS are high rents, low property standards and low service standards. If the missing income from tenant fees is passed onto landlords, then landlords will likely increase the rent and/or invest less money in their properties and property standards will drop.
If the missing income from tenant fees is absorbed by the agent, they face trying to offer the same service with fewer resources and service standards will likely drop.
This is not to deny the role of competition in driving innovation and disruption through an industry. There is already an oversupply of letting agents and competition is rife. State intervention is a particularly blunt form of disruption, especially when used for short-term electioneering to recruit young tenants as voters and not long-term constructive change in an industry.
The policy ignores the real problem which is the painful shortage of new housing completions and new social housing over the past 15 years, but this appears to be too difficult for politicians of all parties to tackle effectively.
Registration, accreditation and licensing
The one issue that everyone agrees on – except the current Government – is that letting agents should be regulated. We would love this to happen as it would professionalise the industry and highlight the cowboys.
England is the only part of the UK with no regulation or licensing in the PRS. It seems that if Labour and/or the Liberals win the election, they will introduce some form of landlord registration. Wales is introducing a 2-stage system where both landlords and agents must be registered and licensed. If a landlord is registered but not licensed then they cannot legally issue a tenancy agreement. This is either very thorough or heavy-handed, depending on your point of view. Our view – which differs slightly from David Smith’s view on Page 22 – is that neither voluntary accreditation nor mandatory landlord licensing are a sensible next step. Our priority would be to focus on regulating letting agents thoroughly and effectively. Then using a regulated, licensed agent could be the proxy to ensure that landlords are up to standard. This gives huge scalability to the tasks of trying to ‘regulate’ the sector rather than trying to do it landlord by landlord.
Of course, some landlords do not wish to use a letting agent and so perhaps the solution is to offer landlord licensing as the alternative. However, the worry is that good landlords will comply, bad landlords will not and enforcement will require resources that local authorities do not have. Any system needs real teeth or it will not change behaviour in the PRS.
You can learn more at this year’s Property Intelligence on 8th October at Oxford’s Saïd Business School.
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