Wednesday, 30 April 2014

How not to solve the UK's housing problem

The UK’s Opposition leader, Ed Miliband, is to announce a program of changes to the housing rental market as part of his election manifesto. The key points will be:
  • Three-year secure tenancies
  •  Rent rises limited to inflation or local average rent rises
  • The end of rental fees for estate agents
The UK has a long and unhappy history of experiments with rent controls. Predictably, therefore, the Labour leader stopped short of describing the restricted rent rises as “controls”, preferring the term “rent caps”. The Government’s spokesman Grant Shapps, however, described them as “Venezuelan rent controls”. And the right-wing economics think tank the Adam Smith Institute, in a press release, reminded everyone how unhelpful rent and tenancy controls can be: they tend to drive landlords out of the private rental market, restricting supply and creating long waiting lists.

But I want to know where the “draconian” rent rises are that Ed Miliband considers need to be capped. Two years ago there was perhaps a case for a temporary cap on rent rises, since rents at that time were rising fast due to very tight credit conditions in the mortgage market and a serious shortage of affordable housing: though even then, a better solution would have been measures to improve availability of mortgage credit and supply of affordable housing. But according to the ONS, rents are no longer rising steeply. The ONS produces a quarterly index of private housing rentals: the most recent, for January to March 2014, shows that rents have risen at an average rate of 1.0% year-on-year across the UK as a whole. Even in London, where house prices have risen sharply, rents have only risen by 1.4%. These can hardly be considered exorbitant rent rises.  

This could of course change. After all, rents do tend to track house prices. But at the moment, rent rises are well below house price rises, which suggests that there is no shortage of rental property. This is most likely due to expansion of the Buy-to-Let market by investors looking for yield: because house prices are rising fast, returns on property are high for cash buyers, so income from rent is becoming less important.

Some property owners prefer to leave property empty rather than have to manage tenants. Miliband should note that lengthening secure tenancies is likely to increase the number of properties left empty. If a future Labour government implemented this policy, they might also wish to consider imposing a tax penalty on unoccupied properties.

But I really struggle to see what the point of this proposal is. In some areas there are shortages of certain types of property, particularly small flats, and the rents on these therefore tend to be higher. Where shortages are severe, there may indeed be unreasonable rent rises. But the solution is to provide more of this type of property, by building new blocks of flats and by converting larger properties. Imposing rent controls – for that is what they are in reality – across the entire housing market is not the way to address local shortages in particular types of property. It won’t solve the property shortage and it will simply create distortions in other parts of the market.

The ONS figures show that in general, people who are renting are currently not experiencing massive rises in the cost of shelter. The people who ARE experiencing ridiculous rises are those who would like to buy, who are being priced out of the market. Price rises in London driven by property investors are now rippling out to other areas. And far from helping people to buy at a price they can afford, the Help to Buy policy is pushing up house prices still more, making property even more unaffordable for young people in particular. It’s a disaster.

If Miliband is really concerned about high housing costs for both owner-occupiers and tenants, the most useful measure he could propose would be drastic relaxation of planning controls. He could also consider a program of social housebuilding, particularly in low-income areas. These measures would address the real root of the UK’s housing problem, which is restricted supply. Messing around with tenancy agreements and rent caps while the cost of housing is spiralling out of control might buy him a few votes, but it won’t resolve the UK’s housing problem.

Related reading:

The housing conundrum
Ed's brave housing proposal - Alex Marsh

11 comments:

  1. Agreed on lack of supply as the cause, perhaps a tax on developer land banks migt do it? Aren't Many land banks kept from development for the same reason people keep properties empty: the rent becomes irrelevant when the land appreciates so much? Restricted supply is not simply about planning controls but speculation. Taxation would (ok, might) address it.

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  2. Rent is set by actual wages. House prices are set by available credit. House prices have detached from wages. This allows rents to be at the upper end of feasible. They can go no further as one cannot get blood out of a stone.

    This is a very naive article. If the UK "solves" property prices banks implode and the UK goes down the tubes. They don't want to fix this. If they did they could not. This is simply the end game.

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    1. Ben F

      I am well aware of the possible effects on banks of really solving the property problem. Indeed I have written about it previously:

      http://coppolacomment.blogspot.co.uk/2013/05/the-housing-conundrum.html

      There are things that could be done that would not break the banks. For example, if you read the post I have linked above you will note that I conclude an increase in social housing would be desirable - which is also what I suggest in this post.

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    2. Interesting read. You missed rent falling impacting imputed rent, now 10% of GDP.

      Your post seems to agree with me - there is no easy solution. As you note social housing would mean nobody new joins the pyramid scheme. No monetising the gains for the boomers facing huge care costs - boom!

      "So we cannot force down house prices, we cannot force up real incomes and we cannot vastly increase the fiscal deficit."

      I liked the Gordian knot pun. Mr Brown has a lot to answer for.

      Here's my take on it. The UK tripled house prices because they cannot create real growth. So they pumped credit instead. Nothing has changed except that now a whole generation believes housing is *the answer*. Demographics will see pension costs (sorry "welfare") balloon.

      Politicians will say whatever they think will get them elected by the boomers+. Boomers+ will elect anything that ramps housing. Look at the Tories closing and passing Labour since the housing market went up. Bank staff will lend like mad irrespective of the long-term consequences for the business they care nothing for.

      The linked article concludes Britain is painted into a corner. Demographics are setting the room alight.

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  3. Completely disagree.

    Firstly, the private rented sector (PRS) has changed a lot since the Housing Act 1988. Then the PRS was small and generally a temporary tenure for childless young people. Now it is lived in by half of under 35s and a fifth of children and, for many, is a permanent tenure. 6 month contracts are no longer fit for purpose.

    Secondly, the PRS letting market is broken. Unregulated lettings agents charge large, opaque and arbitrary fees and - due to their own financial interest - impose inefficiently short contracts to guarantee renewal fees every year. Moving all fees onto the landlord - and so pricing them into rents - will definitely make the market work better. And will also give more bargaining power to tenants as their outside option at renewal no longer involves paying a £1,000 fee.

    Third, sorting the above issues out will help dampen the housing market as, if the PRS is a more stable and appealing option, tenants will no longer be so desperate to buy that they ignore the fact housing is so overpriced banks demand a guarantee on the first 25% of a mortgage from government to lend money.
    Fourth, why is setting price at the start of a 3-year contract so bad? This price will still be set by the market not the state. Setting prices at the start of a contract is standard capitalist practice rather than communism isn't it?

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    1. I don't disagree with your description of the current problems, but I do wish you would think about the way in which landlords and lettings agencies would be likely to respond to the changes. It's not that simple.

      But my real issue with this proposal, which you ignore almost completely, is that it does not address the problem of high and rising house prices. You suggest that it would dampen the housing market by reducing demand from first-time buyers. But they are not the primary driver of house price rises. Resales and property investors are much more important - and Miliband's proposal does nothing at all to dampen these. Indeed, forcing rental fees on to landlords might force up house prices in the buy-to-let market or encourage investors to leave properties empty.

      Government price-setting in private markets is not capitalist. Not even slightly.

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  4. I think of the proposals more as fixing the broken private rented sector rather than the long-term solution to house price increases which require a more structural solution based around more supply and sorting out the distortionary tax treatment of owner occupied housing (worth an estimated £17 billion to owners and providing an inefficient incentive to invest in housing rather than more productive investments for the economy as well as an incentive to over-consume housing). I agree with you on that: these proposals make a positive but marginal difference to that.

    The Government will not be setting prices but setting the parameters of a private contract whose price will be determined by the market at the outset - the rather mild loss is in the ability of private landlords to adjust to shocks over the three years to set against the benefits in predictable of rental streams for both parties (and - of course - long-term contracts won't be worth the paper they are written on if one party can unilaterally increase the price)

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  5. I agree that this is just skirting round the edges of the problem. - planning and supply.

    But I don't really see that there's much or any "government price setting." Landlords are being prodded into three year leases, but they get a rent review every year - five years is standard in commercial. There's no govt interference in setting the initial rent. Or re-setting it at the end of the three years. The landlord can chuck the tenants out if they want to sell, move back in or redecorate in the three year period. Try getting that into a commercial lease. (FWIW I would guess banning agents' fees just means slightly higher rents.)

    Where's the government price setting? And tenants still would not have an absolute right to a three year tenancy.

    (Sorry to niggle when I basically agree.)

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    1. Oh come on. Rent rises limited to inflation or average of local rent rises is government price setting by any standards.

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    2. You've got it the wrong way round. The govt interference is in making it difficult for landlords to grant leases for less than three years. Once you've got a three year lease, you either say "No rent increase in the three year period" or you have a mechanism for reviewing the rent. There's no point a tenant having a three year lease if the landlord can put the rent up by any amount he pleases after a year. Look at how the commercial property market works - landlords can only increase rents during tenancies by the market rate.

      Now, could pushing residential landlords into granting three year leases have adverse side effects? Maybe. Will it solve the housing crisis? No.

      PS, if you'd like to rent my flat for £500 per week for a year, and whatever I damn well want for years two and three, get in touch...

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  6. I presume your title is ironic, as Miliband is clearly not attempting to solve the UK's housing problem. What he is doing is acknowledging two things. First, that rates of home ownership are in decline (and have been for a decade), so more voters are being pushed into the rental sector; and second, that abuses are increasing as the sector suffers an influx of inexperienced landlords and estate agencies.

    The former (the buy-to-let crowd) are often surprised that they have obligations towards their tenants, and are consequently more inclined to terminate lets than address problems. The latter are diversifying into lettings as sale volumes contract and are seeking to replicate a similar up-front fee structure, hence the outrageous "admin charges" (it's analogous to recruitment consultants who've only ever done permanent appointments trying to move into the contractor market).

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