Deep Insight Dr Tom Simcock 10/08/2018

Improving the private rented sector of the future

Introduction

It has been nearly 30 years since the Housing Act 1988 deregulated rents in the UK and spurred growth in the sector. The private rented sector has grown significantly in size over this period, doubling between 2001/02 and 2011/02, and now provides a home for 4.7 million households (MHCLG, 2018). The sector is rapidly becoming more diverse, with an increasing number of families, older renters, and the most vulnerable calling the sector home. This rapid growth, along with the broader economic conditions including the decline of home-ownership, stagnant wages, and the decline in access to mortgages is generating tension both politically and socially.

With 20% of all households now in the private rented sector, this is generating greater political scrutiny and public debate. These debates include issues around standards, security of tenure, rents, and supply.

There are a number of policy areas that are currently under greater scrutiny, and these are security of tenure, standards and efforts to increase the supply of homes. Over the past few years we have undertaken research into these different areas, and our findings show that there are things that could be changed to deliver a better private rented sector for all.

Security of tenure

Security of tenure can refer to many aspects of private renting, including how landlords can regain possession of their property and also the lengths of tenancy offered. The Government is currently consulting on the barriers to longer-term tenancies with a proposed 3-year tenancy model for all tenancies. However, is this option really what is needed for the sector and could this put off landlords from continued investment in the sector?

There are tenant groups within the private rented sector that might not want to be tied to a three-year tenancy agreement, such as young professionals, students or those moving for work temporarily. However, we do have to accept that the growing number of families and older renters would benefit from a longer fixed tenancy agreement if they desired one.

Our previous research found that some landlords prefer shorter tenancy lengths because of past bad experiences with tenants and so that they could regain possession quickly if needed. According to data from the Ministry of Justice it can take on average 22 weeks from claim to repossession, meaning that landlords can be left with significant financial issues if the tenant is in rent arrears. 70% of landlords reported that reform of the Section 8 process would encourage them to offer longer-term tenancies. At the same time, 63% of landlords reported tax relief would encourage them to provide a longer tenancy, and 73% reported court reform and tax relief would encourage voluntary longer-term tenancies. Based on these findings we believe that there could be a better way forward than a blanket three-year tenancy for all tenants.

We believe that landlords could be encouraged to provide voluntary longer-term tenancies without the need for wide-spread regulation, by using financial incentives and the development of a new housing court. Together these would provide the financial security and confidence to offer a longer-term tenancy to those that desire one.

Property standards

A further area of concern that is consistently raised by politicians, stakeholders and the media is conditions in the private rented sector. The latest English Housing Survey shows that property conditions have improved dramatically in the private rented sector. Over the past decade, the mean SAP rating for PRS properties has increased by 49% from 40.4 to 60.3, and the proportion of F and G rated properties have decreased from 39% to 7%. However, there is still a significant percentage of PRS stock was built pre-1919, meaning that these could be more difficult to improve energy efficiency and standards.

In research findings we released this week, we found that some landlords were struggling to afford to bring properties up to the new Minimum Energy Efficiency Standards, but that our previous research had found that 61% of landlords would be encouraged to improve the energy efficiency of their properties if there was tax relief to do so.

Based on this we believe that changing energy efficiency improvements to properties from being counted for tax relief against Capital Gains to tax relief on rental income could support landlords to invest in their properties to improve standards even further. This call has also been made in research from academics at the University of Cambridge in a report for the JRF, showing a broad cross-sector appeal for this change.

Improving the supply of homes

In March, the Prime Minister launched the revised National Planning Policy Framework, and in her speech, she claimed that “private landlords play an important role in the housing market” and that the new planning rules would encourage new homes for rent to be built. Yet, the current Government’s taxation policy for the private rented sector contradicts this, with the introduction of a 3% levy for stamp duty on additional residential properties and is currently phasing out finance relief or as it is more widely known as mortgage interest reliefI. In Ireland the removal of mortgage interest relief acted as a psychological barrier to investment in the sector. The findings of our latest research into the impact of the tax changes found that:

The proportion of landlords that have sold properties is increasing and is up 4% on the previous year
The proportion of landlords that are planning to sell is rising
70% of landlords reported the MIR changes would reduce their profitability, and 62% found this would reduce it by at least 20%
To mitigate any changes, landlords said they would increase rents (67%), leave the sector (25%) or reduce investment (25%)

Not only do these tax changes impact on landlords, but the changes will negatively impact on tenants. Reduced investment in the private rented sector does not help the tenants that are currently living in a PRS home.

We need to increase the supply of homes of all tenures, whether that be social housing for the most vulnerable in society to homes for people to buy. Private renting provides homes to students, professionals for are moving for work, families, and even the most vulnerable in society. Introducing measures that would significantly improve supply would help to strengthen the sector. More homes available to rent would help to increase standards through increased competition between landlords, but would also work to reduce rents for tenants.

To do this, the government could learn lessons from other global examples of more established sectors that have tax policies that support continuous investment (such as Germany for example). Without change, efforts to improve security of tenure or standards could have unintended consequences of pushing good landlords out of the sector and hurting those who rely on the sector for a home now.

Concluding thoughts

The Government is looking at options to introduce longer-term tenancies, and there is the potential for financial incentives for landlords to offer this. A voluntary system with tax incentives could be an excellent long-term investment opportunity, while also helping families to lay down long-term roots in their communities. However, these changes shouldn’t be introduced independently, and there needs to be holistic policymaking. We need greater enforcement against bad tenants and rogue landlords.

Landlords to feel comfortable offering a longer tenancy would need the confidence that they could reclaim their property efficiently and quickly if the tenant were in breach of the agreement.

We are pleased that the Government is listening to our concerns over the current justice system and is discussing the options for a new housing court. This itself it not enough, the taxation of private landlords needs to be comparable with other countries if these regulations were to be introduced.

As in Germany and Ireland, mortgage interest relief would need to be reinstated along with other tax changes to ensure the financial viability of private landlord businesses.