Communities and Local Government CommitteeWritten evidence submitted by the Department for Communities and Local Government

Introduction

Demand for rented housing is growing. The private rented sector has responded to this demand and now houses 3.7 million households in England (equivalent to 17% of the overall housing stock), compared to two million in the early 1980s. 1.5 million homes were added in just eight years between 2003 and 2010—a 55% increase. Much of this growth has been driven by individual landlords with small portfolios, and the lack of large scale investment has constrained further market expansion. Furthermore, growth in the rented sectors has not contributed significantly to the supply of new housing.

Government recognises the importance of the private rented sector and is keen to encourage further growth through the supply of new high quality large scale development for private rent. Encouraging supply will not only provide homes for additional families in the sector but also, by promoting competition, improve standards and affordability compared to the levels that would otherwise prevail if supply were static.

This Government has made a number of changes designed to encourage supply and make it easier for institutional investors to become involved in the sector. We have made changes to stamp duty levied on bulk purchases, and revised the regime for Real Estate Investment Trusts to widen access and reduce the cost of compliance. We have also taken up key recommendations of Sir Adrian Montague’s report on the barriers to institutional investment, announcing:

A new £200 million fund providing equity finance to house builders and developers. It will support the building of large demonstration projects of purpose-built private rented housing, showing the viability of the build-to-rent market and increasing investor confidence.

A £10 billion debt guarantee scheme to support the delivery of i) new homes purpose built for private rent and ii) up to 15,000 additional affordable homes. The scheme will use the Government’s fiscal credibility to reduce the cost of borrowing for housing providers, while attracting investment from fixed income investors seeking a stable, long term return on their investment without exposure to residential rental property risk. We are currently seeking input from organisations suitably qualified and experienced to help set up and deliver the scheme.

A new, expert PRS investment taskforce to facilitate deals and support the delivery of rented homes through bringing together developers, management bodies and institutional investors. This taskforce will address barriers around the relative unfamiliarity of large scale private rented schemes.

Overall, the sector is performing well. Not only has the number of privately rented homes increased in response to demand but the overall standard of accommodation in the sector has improved significantly over the past decade. However, the Government recognises that these trends are not universal and that there is still a minority of privately rented homes that are not in an acceptable condition and a minority of landlords and agents who are not meeting the standards that should be expected of them. This submission sets out Government’s response to those challenges, and in particular responds to the seven issues set out by the Committee.

The quality of private rented housing, and steps that can be taken to ensure that all housing in the sector is of an acceptable standard

1. The quality of privately rented housing has improved rapidly over the past decade, and levels of satisfaction compare well to other tenures (see box). But it is clear that a minority of landlords do not maintain properties to a decent standard. Government is supporting local authorities to take tough action against those landlords.

Condition of/Satisfaction with Privately Rented Housing

The English Housing Survey: Homes Report 20101 reports the underlying condition of housing using a range of characteristics. One indicator is the cost of bringing homes up to a given level of repair. The survey shows that the basic standardised cost of repair2 for the private rented sector is higher than for other sectors, at £17.57 per square metre (£17.57/m2), compared to £11.61/m2 for the overall housing stock. However, this is a significant improvement, in absolute and relative terms, compared to 2001, when the costs were £40.33/m2 for the private rented sector and £19.06/m2 for the overall stock.

In part these differences are explained by the relative age of homes in different tenures. While the private rented sector contains a slightly higher proportion of new (post-1990) homes than the overall housing stock (15% compared to 12.9%), it also contains almost double the number of pre-1919 homes (40.0% compared to 21.7% of the overall housing stock).

According to the English Housing Survey: 2010–11 Household Report,3 83.6% of private tenants are very or fairly satisfied with their accommodation. Whilst that figure is lower than for the owner occupied sector (95.4%), it compares favourably with local authority tenants (76.7%) and housing association tenants (83.2%). Similarly, 71.6% of private tenants are satisfied with the way their landlord carries out repairs and maintenance, compared to 65.8% of local authority tenants and 73.1% of housing association tenants.

2. Whilst average conditions have improved significantly, a minority of privately rented homes are not in an acceptable condition. Local authorities can use the Housing Health and Safety Rating System (HHSRS) to assess properties against 29 different hazards such as damp and mould growth, excess cold, electrical and fire hazards, etc. If a property is found to contain serious, “category 1”, hazards, the authority has a statutory duty to take action. It may compel private landlords to make necessary improvements through the issuing of improvement notices and, in the most severe cases, prohibition notices.

3. Government has been supporting nine local authorities to use these powers in areas where some of the very worst conditions of “Beds in Sheds” occur and has recently published guidance.4

4. We will be working with a wider range of local authorities, over the coming months, to encourage action to be taken against a broader range of rented properties that are not in an acceptable condition

5. Besides regulatory approaches targeted at the worst properties, both landlords and tenants also have an incentive to improve the energy efficiency of rented properties through the Green Deal from February 2013.

Levels of rent within the private rented sector—including the possibility of rent control and the interaction between housing benefit and rents

Rents Levels and Control

6. Across England as a whole, increases in private sector rents in recent years have been modest and remained below inflation. In December the Valuation Office Agency published an indicative median rent of £575 a month in the 12 months to September 2012. The equivalent for the year to September 2011 was the same, £575 per month. More broadly, Rightmove have forecast that two-thirds of landlords are planning to freeze rents next year.5

7. There are currently several sources of data on rental levels in the private rented sector, all of which are indicative but none definitive. The sources include:–

Office of National Statistics (ONS) “private rental’ component of Consumer Price Inflation (CPI).

Valuation Office Agency (VOA)_data.

Surveys by private companies such as LSL Property Services.

English Housing Survey.

8. These data produce a range of values for rent increases between 0.9%6 and 3.3%7 per year. These values do not point to disproportionate overall increases.

9. Most recently, the LSL index for November 2012 showed that rents in England & Wales fell for the first time since March 2011, with average rents at £741 per month. However, the LSL index only looks at new Buy to Let lettings and has a small sample size; and rents will generally increase when a landlord has a new tenant.

10. Looking forward, ONS is improving coverage in the Consumer Price Index of private rents by using Valuation Office Agency data, with the enhanced measure included from March. The Valuation Office Agency data represent the best potential source on private rents and we are working closely with them to improve information on how rent levels vary geographically and over time.

Rent Controls

11. In specific high demand areas, rents have risen more quickly because supply of rented homes has not kept up with demand. Government is clear that encouraging supply of new homes, rather than the imposition of rent controls, is the right policy response.

12. Prior to the Housing Act 1988, the private rental market was in long-term decline, having dropped to just 9% of the housing market in 1988. Regulated rents and lifetime tenancies had meant that being a landlord was simply not commercially viable for many property owners and investors. Controlled rents had meant landlords had very limited funds to maintain properties leading to poor stock condition. And low rents, combined with lifetime tenancies had driven investors away, leading to less supply The resulting shortage of rented accommodation helped neither tenants nor landlords.

13. By enabling landlords to charge market rents and introducing assured shorthold tenancies, the 1988 Act arrested this decline. The sector now accounts for 17% of housing. Consequently, rent control has been ruled out by successive administrations. Instead, we must encourage the supply of new homes for rent.

Interaction between Housing Benefit and Rents

14. Housing Benefit is the third largest area of welfare expenditure. It has gone up from £11 billion in 1997 to £20 billion in 2009 and, if unreformed, will reach £25 billion by 2016. It is right that Government should take steps to manage the cost of housing benefit, and the overall level of benefits that households can claim, as part of tackling the deficit.

15. From April 2011, the rates of Local Housing Allowance were reduced and capped to reduce pressure on the Housing Benefit Bill and help restore fairness to the system. The changes to Local Housing Allowance make it simpler for claimants to understand and easier for people to plan for the future when they know the maximum amount of Housing Benefit that will be available for a whole year ahead.

16. In addition the Chancellor announced in the 2012 Autumn statement that:–

LHA rates will be up-rated by Consumer Price Inflation, as planned, in 2013–14.

For the following two years (2014–15 and 2015–16) increases will be capped at 1%, in line with other benefits; and.

17. We estimate that by 2015–16 rates will be on average just under £4/week lower than they would be otherwise, leading to forecast net savings of £105 million in 2014–15 and £225 million in 2015–16.

18. Government accepts that these changes will have a greater impact on people in areas such as London where demand is high. Government has set aside £140 million over two years to help people affected by these new limits.

19. This ring-fenced funding will be targeted at people in areas where rent increases are causing a shortage of affordable accommodation. This is on top of existing Discretionary Housing Payments.

20. The cap will have a phased roll out, starting in four London boroughs in April 2013. This will allow Government to test its systems and will help all local authorities prepare for full implementation in October 2013.

Regulation of landlords, and steps that can be taken to deal with rogue landlords

21. The majority (83.6%8) of private tenants are very or fairly satisfied with their accommodation and 71.6% are satisfied with the way their landlord carries out repairs and maintenance. This suggests that, overall, landlords provide a reasonable level of service. Of course, not all landlords meet all of their obligations all of the time. The Government wants to drive up standards across the board by ensuring that tenants are well-informed, empowered consumers. Tenants should be clear what they should expect from a decent landlord or letting agent, and what to do if things go wrong. Government will work with the sector and relevant organisations to ensure that both tenants and landlords know and understand their rights and responsibilities.

22. There is, however, a minority of landlords who fail to even meet their basic responsibilities and, in some cases act in a way which is outright criminal. These rogue landlords exploit some of the most vulnerable groups in society and also jeopardise the reputation of the sector. Their behaviours can include placing tenants in overcrowded or poor accommodation (including illegal outhouses), benefits fraud, tax evasion, employment of illegal migrants and other criminal behaviours. This is unacceptable in modern Britain and Government supports local authorities using the full range of their powers against rogue landlords.

23. An extensive range of powers is available to local authorities to take action against rogue landlords. These include powers under the Housing Act 2004, to require improvements where properties present hazards, and to licence certain landlords. Local authorities have the discretion to introduce local licensing schemes to tackle particular local problems. Where landlords do not comply with enforcement action, or licensing provisions, they can be prosecuted through the courts. Local authorities can also join up with other enforcement agencies, such as Her Majesty’s Revenue and Customs, UK Border Agency and the police to gather intelligence and take action across a broad range of illegal activities.

24. It is clear from our work so far that sufficient powers are available to local authorities and other enforcement agencies to tackle the full range of rogue landlord behaviours. But this is nonetheless difficult and complex work. To help authorities use these powers more effectively, Government has:

Published a guide for local authorities on dealing with rogue landlords;9 and

Provided £1.8 million of funding to the nine local authorities where the practice of accommodating tenants in illegal “sheds with beds” is most prevalent.

25. Over the coming months, we will be working with a number of local authorities to broaden the scope of this work beyond the current focus on illegally occupied outhouses, ie “Beds in Sheds”.

Regulation of letting agents, including agents’ fees and charges

26. The Government recognises the importance of tackling bad practice among letting agents. One in five tenants and 17% of landlords are dissatisfied with their letting agent, according to a recent Which? Report.10 According to a recent survey an estimated 85%11 of agents belong to a professional body or organisation. However, previous surveys have shown a much lower figure, around 50%. The Government is keen to raise consumer awareness of the benefits of using an agent which is a member of one of the schemes. There is potential to raise standards across the board, not least by ensuring that consumers are well-informed and empowered to exercise their rights.

27. The Government does not, however, believe that significant burdensome regulation is needed. New regulation could increase costs for both landlords and so far tenants.

28. Letting agents are already subject to consumer protection legislation, which covers issues such as giving false or misleading information to consumers, not acting with the standard of care and skill that is in accordance with honest market practice and claiming falsely to be a member of a professional body or an approved redress scheme.

29. This legislation also includes protections against disproportionate or hidden fees and unfair terms and conditions. Where a consumer (who might be a tenant or a landlord) believes that an agent is in breach of this legislation, they can go to their local trading standards officer or the Office of Fair Trading. The Office of Fair Trading has done a lot of work to clearly set out what is required under this legislation.12

30. In addition to the protection offered by the consumer protection legislation, up to a half of agents are also members of voluntary schemes which ensure that members have the right protections for consumers in place. There are three organisations which run self-regulatory schemes: the Royal Institution of Chartered Surveyors, the Association of Residential Letting Agents and the National Approved Lettings Scheme.

31. All three organisations offer client money protection and professional indemnity insurance to their members alongside requirements as to standards of service and a complaints procedure for consumers. Also In addition the Property Ombudsman scheme requires its members to abide by a code of standards that it is in the process of getting approved by the Office of Fair Trading.

32. Over the last two years the Government has encouraged an increase in self regulation and has endorsed the industry-led SAFEAgent scheme, which is designed to help consumers understand the benefits of using agents with client money protection, by developing an easy to recognise logo. Two thousand agents now belong to SAFEAgent.

33. The Government believes the clear priority is to ensure existing laws are enforced and established protections are extended to cover more transactions. This work includes ensuring that both agents and tenants know their rights and responsibilities.

The regulation of houses in multiple occupation (HMOs), including the operation of discretionary licensing schemes imposed by a local authority for a category of HMO in its area

34. Houses in Multiple Occupation (HMOs) play an important role in housing people who may not be able—or wish—to live as a single household. At the same time, they can present higher risks than other properties (particularly fire risks), as well as more challenging management issues. It is appropriate, therefore, that more stringent regulation is targeted on these properties. Local authorities have a role both in determining whether development of HMOs is appropriate in an area, and in licensing HMOs to ensure good management.

35. The planning development management regime allows local authorities to consider whether developing an HMO, or converting an existing family house to an HMO, is appropriate in the local context. The HMO licensing system, under the Housing Act 2004, ensures that the licence holder is fit and proper to hold a licence, that the management arrangements are appropriate and that the house is suitable for the proposed number of occupiers.

36. The impacts of large HMOs tend to be greater than for small HMOs. So, where a property is to be occupied by more than six unrelated people who share basic amenities, a material change of use from any use always requires an application for planning permission. Similarly, larger HMOs (of three or more storeys and housing five or more people) always require a licence.

37. Because of their lower impacts, it would be over-reaching, as a matter of national law, for smaller HMOs always to require planning permission and/or a license. However, this may be appropriate in some areas, where there are particular problems. So, for smaller HMOs, local authorities have the discretion to:–

Consult on and introduce “article 4 directions” requiring planning permission to be sought where it is proposed to convert a dwelling house to a small HMO.

Consult on and introduce an “additional licensing” scheme to improve the management of HMOs.

38. The Government considers that these arrangements strike the right balance between protecting the occupiers of HMOs and their local communities and minimising regulatory burdens on landlords and tenants.

Tenancy Agreements and Length and Security of Tenure

39. Assured shorthold tenancies were introduced over 20 years ago and have been the standard form of tenancy for over 15 years. This stability, and the balance provided between the needs of landlords and of tenants have underpinned the rapid growth in the sector. There are no plans to change this system.

40. The Housing Act 1988 introduced the current regulatory framework based around the assured shorthold tenancy. The main characteristics of this new regime were the ability to limit the length of a tenancy, a “no fault” possession procedure and allowing landlords to set market rents. The Housing Act 1996 made assured shorthold tenancies the default tenancy for private renting.

41. Under this framework, the number of households renting privately has risen from two million in the early 1980s to 3.7 million in 2010, representing 17% of all households in England.13 In particular, the sector responded flexibly to the needs of households caught up in the recent economic turmoil.

42. A stable legal framework is vital to the continued growth of the sector. This is borne out by Sir Adrian Montague’s Review of the private rented sector,14 which said:

“Investors were attracted by the stability of the regulatory framework. Alongside stable returns, respondents also drew our attention to the importance of the stability of the regulatory framework for renting over the last 20 years. Equally, they warned of the dangers to the attractiveness of the sector were that stability to be undermined. In the 1970s rent controls and restrictions on regaining vacant possession caused institutional interest in the sector to evaporate, and strong Government endorsement of the current status quo in these areas would help to bolster the market.”

43. Whilst assured shorthold tenancies allow the landlord to end the tenancy after the initial fixed term of six months, the English Housing Survey 2010 showed that most tenants in the sector stay for at least a year. It also found that in 2010–11 more than 40% of private tenants had been in their home for more than two years.15

44. More importantly, in the majority of cases it is the tenant who ends the tenancy rather than the landlord. Statistics show that in only 9% of cases are tenancies ended at the instigation of the landlord.

45. The Government acknowledges that there is some demand for longer tenancies, within the existing legal framework. We welcome work that has been done to promote this. Promoting investment in build-to-rent will support growth in longer tenancies, which can meet the investment profile sought by institutional investors as well as demand from tenants.

Homelessness and the private rented sector

46. The Government has empowered local authorities to fulfil their duties to homeless households through the offer of suitable accommodation in the private rented sector. The standard of accommodation in the sector and the stability it offers to tenants are high in the majority of cases and, with suitable safeguards, there is no reason why the private sector should not be used to meet the housing needs of homeless people.

47. The Localism Act 2011 gave local authorities a power enabling them to end the main homelessness duty with a private rented sector offer, without the applicant’s consent. It also allows them the freedom to make better use of good-quality private sector accommodation that can provide suitable accommodation for households accepted as homeless. This power was commenced on 9 November 2012.

48. During the passage of the Localism Act members in both Houses of Parliament and homelessness organisations raised concerns about the quality of private rented sector accommodation. Particular issues of damp, cold, mould and rogue landlords were raised. In response to those concerns, the Government decided that additional regulatory safeguards were necessary, particularly given that these households may be vulnerable and may have fewer choices available to them than other households.

49. It is estimated that 18,000 new private lets will be made each year through this route. This will be monitored via statistical returns from local authorities on how they carry out their homelessness duties. This return, called the P1E, will record how often authorities make use of this power.

50. The Homelessness (Suitability of Accommodation) (England) Order 2012 sets out the circumstances in which accommodation used for the purposes of a private rented sector offer to end the main homelessness duty is not to be regarded as suitable. These circumstances cover five broad areas:

the physical condition of the property;

health and safety;

licensing for Houses in Multiple Occupation;

landlord behaviour; and

elements of good management;

51. The Order provides appropriate protection for homeless households while minimising the requirements on local authorities or landlords which could reduce the number of suitable properties.

January 2013

1 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/6748/2173483.pdf

2 This is expressed in a basic standardised cost per square metre converted to 2001 prices using the Building Cost Information Service (BCIS) National Index.

3 https://www.gov.uk/government/publications/english-housing-survey-household-report-2010-to-2011

4 Dealing with rogue landlords: a guide for local authorities August 2012:, https://www.gov.uk/government/publications/dealing-with-rogue-landlords-a-guide-for-local-authorities

5 Rightmove, Consumer Rental Forecast, 3 December 2012

6 VOA data

7 ONS data used for CPI

8 English Housing Survey: 2010-11 Household Report

9 https://www.gov.uk/government/publications/dealing-with-rogue-landlords-a-guide-for-local-authorities

10 ‘Renting roulette consumer experience of the lettings market’ Which Report November 2012

11 Private Landlords Survey 2010, DCLG, October 2011

12 OFT guidance on unfair terms in tenancy agreements http://www.oft.gov.uk/shared_oft/reports/unfair_contract_terms/oft356.pdf

13 English Housing Survey, Homes 2010, published July 2012.

14 Review of the barriers to institutional investment in private rented homes, 2012

15 English Housing Survey 2010–11 (published July 2012)

Prepared 16th July 2013