Examination of Witness (Question Numbers
303-319)
PROFESSOR TONY
CROOK
23 NOVEMBER 2009
Q303 Chair: Can I welcome you, Professor
Crook. You have been sitting through the previous session, I think,
so you have heard quite a lot of the discussion already about
the private rented sector, but I would like to start with asking
you whether you think that just to set a target for decent homes
in the private sector influences the behaviour of private sector
landlords or not.
Professor Crook: Chair, I will
answer your question indirectly if I may because I have not done
any work on that, as I made clear to your team. The key issue
is the question of incentives. The work that I and my colleague,
Peter Kemp at Oxford, did for CLG's predecessors was a series
of studies looking at the English House Condition survey. We interviewed
all the landlords who owned the samples, we looked at their expenditure
over a series of English House Condition surveys and two things
became clear. I hope it will be a helpful answer. One is that
we have seen an enormous change in the structure of ownership
in the benign economic environment of the last ten years. We have
had a big entry of a lot of very small-scale part-time landlords
managing property on their own, many without qualifications, at
least half the sector managed by those landlords, the vast majority
of these new landlords looking for a return comprising capital
gains and income returns. That is point one. Point two is that
when you look at the repair standards you see something quite
remarkable. There has been a big increase in standards. It is
largely due to the entry into the sector of the buy-to-let landlords
who have brought in property, not newly built, although that is
increasing now, but from the owner occupied sector which has better
standards, built in the 20th century, and indeed a substantial
proportion now built in the 21st century. However, if you look
at the trends in standards you will notice this, that the best
are getting better and the worst are at best standing still, and
then you look at the nature of ownership and you find that the
properties which are getting better are owned by sideline landlords
who largely primarily are not investing for an investment motive.
They have bought the property because they want to house their
daughter who they anticipate will be going to university or it
is the retirement home of a minister of the Church of Scotland
where we have done some work recently for the Scottish Government.
When you look at the properties which are at best holding their
own, they are owned by landlords with an investment motive, and
quite rightly so. There is nothing wrong with owning a property
for an investment motive; let me make that quite clear. As researchers
do, we kind of scratched our heads at this and thought, "What
is going on here?". We looked at the nature of the investment
returns, we plotted a number of data points, and what we noticed
was that rents are not related to conditions. Rents are about
location, location, location. We have done some work for The Rent
Service which your advisers will find in a note I have provided
through one of your team. You can find no relationship between
market rents and physical conditions. What you can find is a very
clear relationship between rents in the old controlled sector
and conditions where the rents were set by valuers who took this
into account. This is quite logical because short-term tenants
are looking for location, closer to the tube in London, if you
like, but not absolutely next door. They are looking for white
goods and they are not taking a long-term view of the condition
of the dwelling. They are not, as it were, looking at this property
and saying, "Ah, look; it has not got a good damp-proof course.
In 20 years' time this might be a problem". They will be
moving on in six months, so at the bottom end of the sector you
have got the market not generating the higher returns that the
landlord could earn by investing. At the same time you have got,
as we heard from your previous witnesses, tremendous difficulty
for the local authority in carrying out enforcement because of
the lack of resources, the fact that tenants on the whole do not
complain and the grant system has largely disappeared over the
years because local authorities are no longer required to give
a grant if they undertake a certain kind of enforcement action.
You therefore have a combination of circumstances—a change
in the structure of ownership, a market that does not generate
the returns that would help landlords at the bottom end of the
market invest for investment reasons, and at the same time you
have got a big shortage of housing in certain parts of the market,
particularly affordable housing, and it is possible for landlords
to make returns by neglecting the property. In fact, if your adviser
looks at the work we did for the CLG you will find that returns
are better at the bottom end of the market than at the top. That
is a long answer to your question but I hope it is helpful context.
Q304 Chair: It is, and, just before
I hand over to my colleague Neil, can I explore slightly more
what you said about effectively the binary nature of the market,
the retired Scotland minister? Are there lots of them?
Professor Crook: It was an example.
Q305 Chair: The other sector you
said was landlords who basically buy the properties as investments.
If a property is extremely energy inefficient is it still a good
investment? I suppose if it is next to a tube station it could
be, or are there three sectors, is what I am asking? Is there
a third sector which is ropey properties where there is nevertheless
a market and where you can still get a return?
Professor Crook: There is probably
a one per cent maximum market right at the bottom of the market
in difficult circumstances, often in northern towns where landlords
may be farming housing benefit, but it is a very small part of
the sector and I was not referring to that in my binary division.
We looked and ran technically some regression analysis on a database
of 300,000 market rents for The Rent Service and the only variables
which come up are location and size. Let me make a caveat to that.
That is for one and two bedroom accommodation. When you look at
three and four bedroom accommodation, which is more suitable for
larger households, which might be groups of students but it does
include households with families, other variables come into the
equation and they include crime rates and key stage two results.
There is a hint there that with the growth of families in the
private rented sector people are looking for neighbourhood quality
as revealed by school quality and crime rates, but in the vast
majority people are looking for nearness to work. In fact, rents
decrease the first 100 metres from a tube station then rise rapidly
afterwards, which is probably telling you something about the
nature of the immediate environment around the tube station.
Q306 Mr Turner: You have probably
answered all the questions I was going to ask you so I will skip
the first one and go on to the second one. What kinds of incentives
do you think landlords would need in order to invest? Would tax
relief on improvement work be an incentive that would work?
Professor Crook: What we have
observed in the data is that where conditions are good landlords
continue to invest, and I think there is a kind of stewardship
attitude that we are talking about here. In other words, it is
not wholly economic man or woman making the decision, but landlords
owning property believe it should be maintained and will tend
to invest over and above that which is necessary. At the top end
of the market landlords who invest in that way can probably achieve
capital gains as well. I think at the bottom end of the market,
and when I say "the bottom end of the market" I am talking
about the market where conditions are poor and probably energy
efficiency is low, the German system is interesting. Your previous
witnesses referred to that, I thought quite helpfully, because
there is a system of regulation in Germany which leads to that
result.
Q307 Chair: Can you just explain
that a bit more clearly and then come back to your line of argument?
Professor Crook: Rents in Germany
have been regulated for a very long time and so energy efficiency
will be reflected in that. CLG are about to commission some work
on that, I understand, on international comparisons.
Q308 Chair: Sorry; I deviated you.
Professor Crook: Mr Turner, you
asked me what incentives landlords respond to.
Q309 Mr Turner: Yes, whether or not
tax relief would be an incentive to carry out work.
Professor Crook: If we are talking
about conditions at "the bottom end", probably in areas
of houses in multiple occupation, probably areas where the tenants
may be vulnerable, what incentives do landlords need? Probably
good enforcement action with the availability of grant. It is
interesting, if you look back in the past, that where local authorities
have had success, and this is an enormously difficult area, as
your previous witnesses have intimated, is where they have taken
enforcement action and they have had the grant support to follow
that up things have happened. However, there is every disincentive
for landlords to invest in the sense that if they invest the rents
probably will not go up dramatically, and in the kinds of areas
we are probably all referring to that you will be aware of in
your constituencies, capital gains may not increase significantly,
so if you like there is every incentive just to continue to take
the income because the tenants will continue to pay, yet the social
argument for investing must be high, both in terms of the health
and safety of the tenants and in terms of the wider neighbourhood
impact. I think the change in the financial regime has probably
made it more difficult for local authorities to do this because
they cannot. You referred earlier, Chair, to the regional housing
pot and I do not have the data on that, but, of course, there
are competing claims that local authorities have.
Q310 Mr Turner: There has been a
big call for, for instance, no VAT on house improvements, et cetera.
I take it from what you are saying that you think that would be
a blunt instrument and that a targeted grant system would be more
effective in raising standards.
Professor Crook: Correct. I am
not saying that would not be unhelpful.
Q311 Mr Turner: But if you have got
a pot of money then it would be better to have a grant system?
Professor Crook: Yes, allied,
if I may say, Mr Turner, with the fact that there is a strong
case for arguing that many of these circumstances continue to
prevail because of the shortage of affordable housing. Many of
the low income vulnerable people may be better off in the social
sector. I am not principally saying registered social landlords
but private landlords who operate under HCA grant who are looking
for longer term circumstances. Many landlords in those circumstances
perform a valuable function as sort of quasi-social workers by
providing the difficult accommodation which is lowish cost for
them.
Q312 Mr Turner: That is interesting
and it brings us on to the next question. Do you think that increased
competition within the lower end of the sector would also improve
standards?
Professor Crook: As an economist,
in principle I ought to say yes to that, ought I not? I forget
which minister it was, in one of the many attempts to try and
increase City of London investment in the sector via housing investment
trusts, real estate investment trusts, who talked about getting
in `the good money to drive out the bad', and in a sense that
ought to be right, and that could include competition from the
social sector as well, which often gives quality accommodation
on reasonably secure terms, not indefinite security, providing
for people who at the moment have nowhere else to go and find
it very difficult. There are big regional contrasts here. The
situation in London will be very different from the situation
in Sheffield where I work and in the small Derbyshire village
where I live, and that would have to be taken into account. However,
the attempts to get large-scale capital into the private rented
sector have not worked so far. The jury is still out with the
recent initiative from the Homes and Communities Agency, as you,
of course, as Members of Parliament, will be aware.
Q313 John Cummings: Is lack of knowledge
or standards or stock condition by landlords a persuasive reason
for low standards?
Professor Crook: I am not sure
about "persuasive reason". However, the evidence is
quite compelling, not just the evidence that Professor Kemp and
I have but in other surveys too. We have, by the way, just completed
the parallel to the Rugg Review for the Scottish Government. In
terms of landlords who have been recently attracted into the sector,
the vast majority of the stock is owned by new landlords. I emphasise
my last point—the vast majority of the stock is owned by
new landlords, many of whom have come into the sector attracted
by the possibility of short-term capital gains and that has been
very clear in the last few years. Many of them approach property
saying, "It is like owning your own house. I know how to
do this", but are not aware of their responsibilities as
landlords and have found it difficult, though there are exceptions,
to find good managing agents, and many of them either do not have
an awareness of their rights or of their tenants' obligations
and find it very difficult to find out about standards. The Scottish
registration system, if I may say so, in answering a question
which you have not asked me, has not addressed that problem adequately.
I appreciate that that is a matter for a devolved administration,
of course, not for yourselves.
Q314 Chair: What is the Scottish
registration system, briefly?
Professor Crook: Briefly, yes.
With limited exceptions, all landlords are required to register
themselves and their property. They have to pass a "fit and
proper person" test which is basically not having a criminal
conviction, and they pay to be registered. All the evidence suggests
that the register is not complete. You might expect this, as there
are some landlords who perhaps would not bother to register. Landlords
say this is an increased burden on them and they only wish the
local authorities—and we found this very interesting in
our evidence—were chasing the bad landlords "because
they are tarring the brush of all of us", and felt that—and
this is in our report to the Scottish Government and your advisers
can find it on the Scottish Government website—this was
a proposition that might have been used much better.
Q315 Alison Seabeck: I am going to
link that to regulation of managing agents and what is being looked
at here because that links into some of the proposals we have
just been talking about. Do you feel there is a role for regulation
of managing agents in England?
Professor Crook: Yes, in principle,
because there needs to be a good redress system. I say that because
it is the one area of consumer protection which is missing and
it seems to me ought to be completed.
Q316 Alison Seabeck: Do you think
there is scope within that for enabling that form of regulation
to help drive Decent Homes standards improvements as well?
Professor Crook: You have talked
about the managing agents. I do not know whether the question
is more general.
Q317 Alison Seabeck: This is slightly
more general, whether or not we could use a system of regulation
to drive and indicate standards.
Professor Crook: I am happy to
answer the more general question; forgive me for seeking clarification.
My view is one of advice rather than particularly answering the
question. I am not trying to evade it. I think we need to be clear
why we want this. Is it in order to collect a database so we can
follow up? If so, how can we be sure that everybody will register?
The Scottish evidence is quite clear here, and I am not blaming
anybody in Scotland for this, by the way; a vast amount of IT
work has been done on this. Is it about saying that in order to
be registered you have to pass a fit and proper test, in which
case one would probably want to go beyond the mere compliance
with not having a criminal conviction, apart from, obviously,
penalty points on traffic offences. One might want to look at
whether people have been convicted in terms of housing management.
Is it about getting a better information flow? Is it about weeding
out the "bad landlords" and their conditions, and, if
it is, how would it work? I have constantly asked myself the question
because HMO licensing has not—I heard the exception to that
from your last witness; it is very interesting to hear that. I
do not know the evidence on that.
Q318 Alison Seabeck: It is just that
we have not been able to see it yet, if it is with the BRE still,
the evidence you were talking about on HMOs is still with the
BRE, I think.
Professor Crook: But if the landlords
owning the worst properties have reasons for not registering the
question is, how do you do that? Local authorities are quite capable—I
suspect there are some in the public gallery—of using IT
systems, subject to the Data Protection Act, to work out where
these are. The fundamental problem is a lack of resources. Your
previous witnesses, and I read it last night on your website,
said that there are 1,600 environmental health officers; it is
a compellingly low figure. The work I did, which was published
in a journal called Policy and Politics, which your advisers
can look at, looking at the experience of environmental health
officers in trying to enforce standards in houses in multiple
occupation showed that it is fundamentally difficult, first, to
find them, and, secondly, tenants will not necessarily welcome
them coming in and enforcing because they will be concerned, if
not about retaliatory action, that their rents might go up as
a consequence. In other words, we have a domain there where the
tenants are actively seeking low standards. There are some interesting
issues about A8 migrants here and it provides a potential moral,
if not legal, conflict of interest for local authorities which
I have discussed with some chief executives. A8 migrants have
come here not intending to stay. You will know about this. They
are quite happy to live in quite appalling accommodation because
they can repatriate their income to for example, Romania. I chair
a think tank in south east Europe and I am aware of this conflict
for the local authority. These conditions are in conflict with
our standards and yet the tenants do not welcome the visit of
the environmental health officer, so you have very difficult circumstances
there. In terms of the proposals that are coming out day and night
on registration, they have to be absolutely clear what the purpose
is and how we are designing them and how we are going to use them,
but I am not absolutely sure that we are clear on that, "we"
being a multitude of people.
Q319 Chair: Can I press you on that?
One could see that there would be several purposes. One might
be improving fire safety. One of the reasons why the HMO registration,
as I understand it, was targeted at three storey and above is
that that is where most of the fire deaths occur.
Professor Crook: And that was
why it was made mandatory.
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