In the rental property market Labour’s ‘cap’ should fit

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May 7, 2014 by Paul Goldsmith

Mandate for Change

In terms of consistency of policy aim – the announcement by Ed Miliband of Labour’s ideas to reduce the imbalance of power between landlords and tenants in the UK’s rental market are an expected angle to take on the property market. Sadly, what was also expected was the rather infantile and mendacious response by the right-wing press and the Conservative Party. Both were simply par for the course – using a clear attempt to mis-represent (I am being soft with language when I use that word) the policies rather than a considered response to what are actually sensible proposals for such a vital market which, let’s not forget, provides shelter – an economic necessity.

First of all – what were the policies? – It’s very important to read them carefully before forming an opinion – so here goes.

1) Landlords and tenants in England would agree initial rents based on “market value” and, thereafter, a review could only be conducted once a year.While landlords would still be able to increase what they were charging following changes in market conditions, there would be an “upper ceiling” to prevent rent hikes out of step with the overall market.The threshold would be based on an industry benchmark of average rent rises. 

2) Estate agents would also no longer be able to charge a letting fee for renting out properties in addition to requiring a deposit and the first month’s rent upfront. 

3) Rules on tenancy agreements would also be changed to give more certainty to tenants wanting to remain in their properties for an extended period.As now, a tenant would be able to terminate a tenancy after the first six months, with one month’s notice. But a landlord could only do so with two months’ notice and if certain conditions were met, such as the tenant failing to meet their rental payments, engaging in anti-social behaviour or breaching their contract in other ways. After the six-month probationary period, contracts would automatically run for a further 29 months. During this period, landlords could only ask tenants to leave for a breach of contract, or if they wanted to sell the property or needed it for their own use, not as a way of raising the rent. Students and business people on flexible contracts would still be able to request shorter tenancies while existing contracts for buy-to-let properties agreed before the changes took place would be honoured.

The response that I mentioned at the start of this blog included Tories calling these policies “Venezuelan style rent controls” and the Lib Dems saying that this would “crush supply” and also using the classic redoubt of the critic without a case – that Labour had had 13 years to solve this problem and hadn’t done so (Miliband has admitted many things weren’t done between 1997 and 2010 so I’m going to ignore this point).

So, let’s start by pointing out the vital point in answer. These are not rent controls. Rent controls are where a maximum price is set on rent – which would most likely be below the “equilibrium” price (where demand would meet supply). This can cause shortages, because at the maximum price, the supply of rented properties will not be enough to meet demand. But these are not rent controls. The policy clearly states that the initial rent will be arrived at by negotiation between buyer and seller (market value). The “cap” is on the increases that can follow for the next three years.

So, what a landlord cannot do now is to decide that they can get a lot more rent from someone else, so demand at the end of a year long contract a massive rent rise. This happens, and if it means that a low income family have no home, it is extremely serious for them. Instead, they will have security of tenure (as long as they don’t breach the contract) for three years – subject to rent increases which would have an upper ceiling set by using the market average.

Point 2) was always a ridiculous exploitation of those who rent anyway and it was about time the estate agents received their fees from landlords and didn’t try to fleece tenants anymore than they have to.

Point 3) is important because it makes a three year contract the norm, which as I said gives tenants security of tenure – and when it comes to housing, that is important.

Put simply, what Ed Miliband is doing is consistent with previous policies because he is attempting to distinguish in different markets between predators and producers. If you produce a good property to rent, and provide it to those who cannot afford to buy you can still make plenty of money. But if you exploit those who are just looking for someone to live, you are going to find barriers in your way.  It is correcting an imbalance and it is long overdue.

As for the idea that it would “crush supply” you have to think about whose supply it would crush. I have a friend who owns quite a few buy-to-let properties. This isn’t his job, his job pays him enough that he can own many other properties. The fact that he can afford so many properties pushes property prices up out of the reach of so many people and if these proposals made him put some of them back on the market would it be such a bad thing? Many might say that a market with such unequal outcomes is failing. When it is a market for a necessity like a home, it is a serious failure.

Let’s look at it another way. The price controls Miliband suggested in the Energy market are much more serious as they could choke investment in an industry that desperately needs it for the future. The property market is hugely unbalanced between the ‘haves’ and ‘have-nots’ and if some people who fancy buy-to-let as a way to earn some easy money by exploiting those who desperately need somewhere to live find that harder, then I can live with that.

 

 

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