As we approach the General Election on 12th December it seems that the Labour Party is determined to spend, spend, spend but cut back on rents. A recent report suggested that Labour is outspending the Conservative Party in their manifesto on a ratio of £28 for every £1 promised by the Conservatives. Indeed we saw promises of a £75 billion investment in the UK housing sector which would bring about a new wave of council properties. However, today we see the re-emergence of the Labour Party’s long standing rent control policy for private residential properties.
Does the UK need rent controls?
There is no doubt that a lack of newbuilds in the UK has had a huge impact upon demand for private rental properties. Since the 1980s the “right to buy” policy followed by many governments has led to a significant reduction in council housing stock. Under Labour the tide will turn back in favour of replenishing council stocks but this will take some time. In the meantime, a Labour government would look to reduce rent increases more in line with the cost of living.
What are rent controls?
In simple terms, the Labour Party is looking to introduce rent controls which would outlaw rental increases above inflation. It is highly likely that it would also make it more difficult for landlords to increase rents above inflation, even after a tenancy has lapsed. The idea is that rents would only be allowed to move broadly in line with inflation which is often central to wage settlements. In the event of a Labour government there would be more power handed back to the unions with inflation/wage settlements likely to move in tandem.
Do rental controls exist elsewhere?
While sceptics will hark back to the days of the Blitz and the Second World War as the last time the UK encountered rent controls, this does not give the overall picture. There are currently rent controls in Germany across 313 of the 11,000 towns and cities in the country. This equates to around 25% of the population and with just 51% owning their own homes, this is a big deal in Germany.
While the formula would be slightly different in the UK, in Germany landlords are banned from increasing rents more than 10% above the local average for the preceding four years. There is research to show that rent controls have helped to improve housing issues across many parts of Germany where rents had spiralled out of control. Whether the scheme has been as successful in less popular private rental markets is debatable.
Is there an appetite for rent controls?
It is obvious that tenants would welcome rent controls as rental values across some parts of the UK have spiralled out of all control. These relatively high rental rates tend to be in property/employment hotspots where there is limited private rental property available. The fact that wages have grown a lot slower than the cost of living in the UK since the 2010 economic downturn is a major issue.
Growing dependence on private rental properties has an obvious knock-on effect to first-time buyers. Figures from the ONS show that the number of private rental properties in the UK increased from 2.8 million in 2007 up to a staggering 4.5 million in 2017. This growing demand for rented accommodation created significant upward pressure on property prices, as the number of newbuilds failed to keep pace with demand, pushing more frustrated potential first-time buyers to private rented accommodation. This again pushes property prices higher and the vicious circle starts.
How would tenants benefit?
The biggest benefit that tenants would see from rent controls would in theory be the fact that rents would increase broadly in line with the cost of living. As we touched on above, many wage settlements are based around inflation/cost of living increases so the relative increase in rents would be negligible. In theory this would allow tenants to plan further forward, perhaps save money for their own property and avoid huge hikes in rents mid-tenancy. At this point it is also worth mentioning the previous Conservative government which was in the throes of introducing regulations to offer greater protection to tenants.
What about private landlords?
There are a number of arguments to take into consideration with regards to private landlords. In theory, if the rent of a property was subdued then this would have an impact on the actual yield on the property and possibly the market value. Many people will buy an asset based upon the yield so if the yield is subdued then the price would likely follow suit. It also looks as though a reduction in rental income would see some landlords tempted to reduce their budget for property improvements across their portfolio. Perhaps this would be to the detriment of tenants?
The main problem, and one which is stuck in the middle of the socialism/capitalism argument, is the fact that a reduced return from private rental property would certainly reduce private sector investment. This in turn would reduce direct funding/demand for new build properties and exacerbate the current problem of a shortage of housing stock.
In theory market forces will eventually flatten out any peaks and troughs with regards to private property rental values. However, this does not help tenants caught in the middle and often subjected to significant hikes mid-tenancy or when looking to sign a new agreement. On one hand, the market will only pay what the market can afford, but on the other hand those on lower income will be severely restricted to the properties they can afford. The elephant in the room is how rent reductions may impact new build numbers and the number of private rental properties going forward.
Even in light of Brexit the UK population will continue to grow for the foreseeable future. This will lead to a significant increase in demand for private rental properties, while council housing stock is replenished, which will require private sector investment. However, if rental increases are restricted this will impact cash flow and also long-term returns. So, we could be in a situation where the number of newbuilds/buy to let properties available is reduced significantly thereby exacerbating the current problem across the UK. Not an easy conundrum!