Communities and Local Government CommitteeWritten evidence submitted by Brian Lund

MEMORANDUM: RENT CONTROL

Brian Lund is Visiting Lecturer in Social Policy, Manchester Metropolitan University and author of Understanding Housing Policy (Policy Press, 2011).

1. Although neo-liberal economists regard rent control as the classic example of the impact of state intervention—control prices at below market levels and supply evaporates―an examination of the impact of rent control in the UK since 1915 reveals a more nuanced picture.

(I)Between the wars the number of dwellings rented by private landlords increased by 500,000 despite the continuation of rent control―introduced in 1915―for existing lower value dwellings (Minford, Peel and Ashton, 1987). This increase was mainly the outcome of new building for private landlord lets that had been decontrolled in 1920 indicating that “the fear of rent control” did not deter new building for private landlordism and that restrictions on letting existing dwellings may have encouraged investors into build to let.

(II)In the post Second World War period the number of properties rented by private landlords declined from eight million in 1944 to a low point of 1.9 million in 1988 before increasing to 4.6 million in 2011. However the rate of decrease/increase has not coincided with changes in the rent control regime. The annual rate of decrease escalated following the 1957 Rent Act to 5.5% but fell after the 1965 Rent Act (imposing “fair” rents) reaching 2.2% in 1980 (Minford, Peel and Ashton, 1987). Between 1989 and 2003 (following the decontrol of the 1988 Housing Act), the annual rate of increase was only 3% compared to an annual rate of increase between 2003 and 2011 of 7.5%.

(III)The declining fortunes of private landlordism in the UK were influenced by stronger factors than rent control. They were:

Slum Clearance

During the two major slum clearance drives in the UK―1933 to 1939 and 1957 to 1977―80% of the 1.4 million houses demolished were in the private landlord sector. Whereas opponents of rent control attribute the creation of slums to the poor returns―insufficient for repairs and improvement—that have been available to private landlords slums existed well before rent control was introduced and continued in the period of “creeping decontrol” between the wars.

The Landlords’ Reputation

The private landlord sector has long-established reputational problems dating from the middle years of the nineteenth century and re-enforced by “Rachmanism” in the early 1960s. The deep mistrust of the private landlord felt by tenants was revealed in the attempt to promote “tenants” choice” in the late 1980s and early 1990s. “Tenants’ choice” offered the opportunity for tenants to vote in favour of a transfer of their homes from their local authority to a private landlord but, despite offers of funds for refurbishment, no such transfers were approved by tenants.

“Social” Housing

Although the number of houses rented by private landlords increased by 500,000 between the wars the private landlords’ relative share of the market declined from 90% to 62%. Until 1919 renting from a private landlord was the solitary option available to the lower paid working class—there were only about 100,000 available homes in what is now called the “social housing” sector. However the 1919 Housing and Town Planning Act heralded a period of sustained local authority building 0for the working class. Between 1919 and 1939 1.5 million council houses were built and, until the post 1933 concentration on houses built to meet the needs arising from slum clearance, they were high quality homes. This pattern was repeated post 1945: good quality homes when building for general needs, poorer quality flats when building for former “slum” inhabitants.

In the early 1960s even the Conservative Party seems to have decided that private landlordism was a lost cause. In a 1960 Cabinet Memorandum the Minister for Housing and Local Government stated “there is no early prospect of private builders coming back into the letting field” and “the only way of making progress would be for the Government to lend money, at current rates of interest, to approved trusts or associations willing to build to let without subsidy on a non-profit making basis” (Cabinet, 1960:1). In 1961 the Conservative government started to promote housing associations as an alternative to private landlordism (and, later, council housing) a policy endorsed by subsequent Labour and Conservative Governments.

The appeal of homeownership: why rent when you can buy?

The promotion of a “property-owning democracy” by the Conservative Party via the alleged “respectable” status of the tenure, local authority mortgage guarantees, tax relief on mortgage interest without Schedule A tax after 1963 and the right to buy produced an increasing number of houses available for owner-occupation from 1954 to 2002.

2. Global Property Guide (2012) has categorised 130 countries as “pro tenant”, “pro landlord” or “neutral”. The United Kingdom is placed in the “pro landlord” category alongside 54 other countries. The 50 “pro tenant” countries are characterised by combinations of minimum three year leases, rent increases restricted to inflation or a house price construction index and local rent tribunals setting rents as a percentage of property value. A study of private landlord regulatory regimes in seven countries concluded that “regulation is not inherently associated with smaller, poorly operating private rented sectors” (Scanlon and Kochan, 2011:142, emphasis original). This finding was backed up by an examination of the private rented sector in eleven European countries that stated:

Comparing the level of regulation in each country with the size of the sector at both the beginning and end of the research period shows very few clear relationships between regulation and scale. Similarly, changes in regulation are not consistently related to changes in scale....

(Cambridge Centre for Housing and Planning
Research, 2012:13)

3. The Rise of the Private Landlord: Tenure Change 2001 to 2011

There has been a remarkable shift in the tenure balance in the last ten years. Post 2001 the number of private landlord houses available for letting started to accelerate and, by 2011, had increased by 2,159,000 to 4,627,000—a share of 17.4% (Department for Communities and Local Government 2012a) and up by 69% in England (Shelter, 2012a). Between 2002 and 2011 the number of houses in the social sector declined by 313,000 and the number of owner-occupied dwellings in Great Britain declined from 17,370,000 in 2002 to 17,275.000 in 2003 but recovered to 17,637,000 in 2005 before declining to 17,233,000 in 2011.

In 2001–02 120,000 new households became homeowners, the net exodus from private landlordism to homeownership was 51,000 and from the social sector to homeownership 5000 (Office of the Deputy Prime Minister, 2002) [these figures exclude sales to sitting tenants]. However, in 2010–11 only 55,000 new households became homeowners, the net exodus from homeownership to the private landlord sector was 27,000 and to the social sector 17,000. (Department for Communities and Local Government, 2012b.)

As Shelter (2012b:1) noted “there are now more than one million families with children renting privately; almost double the number five years ago”—perhaps a consequence of an inability to afford to step up the owner-occupation ladder when more space is required.

There are a number of reasons for the tenure shift towards private landlordism.

(1)The expansion in higher education generated more demand for private rented housing from young people.

(2)In 1995, prompted by the Association of Residential Letting Agents, a number of mortgage lenders started to offer loans to private landlords on approximately the same terms as to homeowners.

(3)A decline in the availability of social housing: between 2002 and 2011 the number of lettings available per year in England in the social sector declined by 87,000 (Pawson and Wilcox, 2012a).

(4)Low accessibility to homeownership.

The number of first time buyers has declined dramatically. In 2001 568,000 mortgages went to first time buyers, by 2006 there were 403,000 but in 2010 only 197,000 were granted (Pawson and Wilcox, 2012a). House prices have had an impact in creating this dearth in first time buyers. In the boom housing price years from 2000 to 2007 the house price increase in the UK exceeded that in the USA, Ireland and Spain yet, despite the slump in UK house prices between late 2007 and early 2009, over the last five years, in cash terms, the fall in house prices has been 7.77% in the UK, 18.52% in Spain, 19.37% in the USA and 49.11% in Ireland (Global Property Guide, 2012). This price pattern has been the outcome of the failure of the UK housing system to respond to market signals. In the boom housing years from 2000 to 2007 new house construction in the UK lagged way behind other countries that experienced a similar price boom (in 2004, for example it was 3.2 per 1000 of population in the UK, 19 in Ireland, 12.6 in Spain and 7.1 in the USA (Royal Institute of Chartered Surveyors, 2007; Joint Center for Housing Studies of Harvard University, 2012).

Nationwide’s “First Time Buyer Affordability Indices” (Nationwide 2012) measures mortgage payments for first time buyers as a% of take home pay with an index base of 100 in 1985. The index was 68.1 in the first quarter of 2002 rising to 137 in the fourth quarter of 2007 before falling to 87.1 in the second quarter of 2012. The post 2007 decrease has been more a consequence of decreases in interest rates than declines in house prices (the house prices to earnings ratio declined from 57 at its highpoint in early 2007 to 48 in 2010 whereas mortgage costs to earnings declined from 37 to 21 in the same period [Pawson and Wilcox, 2012b]) However, as “affordability” for first time buyers improved, credit availability plummeted. At a time of erratic house prices, accusations of irresponsible lending in the past and regulations requiring lenders to keep a set reserve of cash with the Bank of England in relation to its residential mortgage lending mortgage providers have demanded higher deposits. In 2007, first-time buyers paid deposits averaging 10%. By 2009 this had risen to 25% and in 2012 it was 20%.

5.Crowding out by private landlordism

It is no coincidence that the decline in homeownership has mirrored the rise in private landlordism: the private rented sector has had a role in keeping potential first time buyers out of the market. Potential first time buyers compete in the same market as private landlords and, if unsuccessful, add to the demand for rented property thereby forcing rental prices upwards. The contest is unequal with 20% deposits demanded from first time buyers whereas 36% of private landlords have the resources to purchase without a mortgage (Department for Communities and Local Government (2011:28) and, if mortgages are used by landlords, the interest payments can be set against rental income (Owner-occupiers can no longer offset mortgage interest payments against tax liabilities). Since 2002/03 rents have risen faster than wages and now rents absorb 27.1% of weekly wages compared to 20.9% in 2002/3 (Labour Party, 2012 p 7) adding to the savings for deposit problem for potential first time buyers. According to Global Property Guide (2012) the UK has the second highest rents per square metre in Europe but rental yields at 3.43% are one of the lowest (a consequence of the high cost of buying in the UK). In 2009 the proportion of households in the “market rent” sector experiencing a “housing cost overburden” (ie spending more than 40% of their disposable income of housing) was 40.7% in the UK below only Greece (67%), Hungary (44%) and Rumania (56.5%) in the 27 EU countries (European Commission 2012).

4. Housing Benefit

Despite eligibility and entitlement reductions, which have pushed much of the cost of higher rents onto the tenant, expenditure on Housing Benefit continues to increase. The number of private rented sector tenants receiving Housing Benefit has increased from 1,054,810 in November 2008 to 1,645,730 in May 2012 compared to a rise in the social rented sector from 3,109, 370 in 2008 to 3,382,870 in 2012 and the average Local Allowance (for private tenants) is now £108.32 per week (Department for Work and Pensions, 2012).

5. Recommendations

(I) Regulate existing lettings but do not subject new building for private renting to rent control and concentrate all tax concessions on build to let: as in the 1930s this might divert potential investors in private lettings to new dwellings.

(II) Examine the tax position of private landlords in relationship to homeowners. The usual comparators for such tax evaluations are other businesses but private landlords are competing with first time buyers.

(III) Historical and international comparisons suggest that “light touch” regulation would involve the compulsory registration of all private landlords (in existence in Scotland, planned in Wales and prepared for in England by New Labour but abandoned by the Coalition Government); automatic extension of “shorthold” tenancies to three years; registration of existing rents and limitations on future rent increases to inflation. The Labour Party (2012) has proposed consultation on a voluntary approach involving encouraging renters and landlords, at the start of a new tenancy or end of an existing tenancy, to offer a three or five year tenancy and an indexed rent increase and an alternative of “giving renters and families a right to longer term tenancies and predicable rents” (Labour Party, 2012:10). Stronger regulation would involve the extension of “fair” rent determination (still covering about 100,000 tenancies in existence before 1989) to other rented property perhaps on a phased basis according to Council Tax band.

(IV) In 2007 86% of 25–35 year olds stated that owner-occupation was their preferred tenure in 10 years time and, across all age groups, 84% wanted to be homeowners and only 2% private renters (Council for Mortgage Lenders, 2007). Be aware that, to the extent that rent control produces tenure change, in the past selling from the private landlord sector to home ownership has made a significant contribution to the growth in owner-occupation. Between 1914 and 1975 3.6 million private landlord homes were sold to owner-occupiers (Department of the Environment. 1977:63)—a far greater contribution to “a property-owning democracy” than the right to buy.

January 2013

References

Cabinet (1960) Memorandum by the Minister of Housing and Local Government and Minister for Welsh Affairs, C.(60) 177. 29 November.

Cambridge Centre for Housing and Planning Research (2012) The Private Rented Sector in the New Century
http://www.cchpr.landecon.cam.ac.uk/Downloads/The%20Private%20Rented%20Sector_WEB.pdf

Department for Communities and Local Government (2011) Private Landlords Survey 2010
http://www.communities.gov.uk/documents/statistics/pdf/2010380.pdf

Department for Communities and Local Government (2012a) Live Tables on Dwelling Stock
http://www.communities.gov.uk/housing/housingresearch/housingstatistics/housingstatisticsby/stockincludingvacants/livetables

Department for Communities and Local Government (2012b) English Housing Survey: Household Report 2011–12
http://www.communities.gov.uk/housing/housingresearch/housingsurveys/englishhousingsurvey

Department for Work and Pensions (2012)
Housing Benefit and Council Tax Benefit caseload
http://statistics.dwp.gov.uk/asd/index.php?page=hbctb

Department of the Environment (1977) Housing Policy: Technical Volume part 111, London: HMSO.

European Commission (2012) Housing Statistics
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Housing_statistics#Housing_affordability

Global Property Guide (2012)
http://www.globalpropertyguide.com/investment-analysis/the-pros-and-cons-of-rent-control

Joint Center for Housing Studies of Harvard University (2012) The State of the Nation’s Housing, http://www.jchs.harvard.edu/research/state_nations_housing
Labour Party (2012) Private Rented Housing: Providing stability and affordability for renters and families. London: Labour Party.
Minford, P, Peel, M and Ashton, P (1987) The Housing Morass: Regulation, Immobility and Unemployment. London: Institute for Economic Affairs.
Nationwide (2012) “First Time Buyer Affordability Indices”

Office of the Deputy Prime Minister (2002) Housing in England 2001–02
http://www.communities.gov.uk/documents/housing/pdf/140726.pdf
Pawson, H and Wilcox, S (2012a) Housing Review London: Chartered Institute of Housing.
Pawson, H and Wilcox, S (2012b) “Housing Market Affordability Eases”
http://www.york.ac.uk/res/ukhr/ukhr1112/UKHRbriefing2012.pdf

Royal Institute of Chartered Surveyors (2007) European Housing Review 2007
http://www.rics.org/site/download_feed.aspx?fileID=1315&fileExtension=PDF

Scanlon, K And Kochan, B (2011) (eds.) Towards a sustainable private rented sector. London: London School of Economics.

Shelter (2012a) Census Housing Data
http://england.shelter.org.uk/campaigns/why_we_campaign/census/census_data

Shelter (2012b) Homes fit for families? The case for stable private renting
http://england.shelter.org.uk/__data/assets/pdf_file/0019/423451/Homes_fit_for_families_FINAL.pdf

Brian Lund
Visiting Lecturer
Manchester Metropolitan University
Author of Understanding Housing Policy: Policy Press (2011).