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The ghost of the 1977 Rent Act stalks the land

Labour have a policy review document newly published, concerning private sector rented housing.  I feel compelled to comment on it because of various skins in the game and the possibly devastating effects if they don’t think this through properly.  Yes, I know it is likely to be ignored, but one must try.  I attach my draft text below and would as ever appreciate comments.

http://www.labour.org.uk/uploads/adaa0b53-702a-4a84-e110-7261b2d5abea.pdf

The Labour Party
Labour Central, Kings Manor
Newcastle upon Tyne NE1 6PA

Dear Sirs

Re: “Private Rented Housing: Providing stability and affordability for renters and families”

I note with great interest your policy review as above.  As both the opinion polls and the bookmakers seem to suggest you will form the next government it behoves all of us in the UK housing industry to participate in the review.

May I applaud your objectives.  Providing housing that can be afforded is a laudable goal and a stable home is also a worthy objective.  There is little of controversy in the aims.  I do have serious concerns about some of the implied policies in the document.

Firstly, it appears that you may attempt to achieve the objective of stability by mandating an increase in the length of tenancies.  Current legislation allows assured shorthold tenancies to be up to five years in length, the minimum being six months.  Simply mandating an increase in the minimum term maybe counterproductive.

We must consider whether an increased minimum tenancy length is likely to encourage more participation in the market from Landlords (i.e. suppliers).  I suggest it would not because of the increased security of tenure tenants would enjoy during this mandatory period.  Those Landlords who want to offer longer terms can do so now.  Forcing suppliers to offer extended terms could easily drive some from the market and prevent others from entering.  This would obviously reduce supply and exacerbate the very issues the document seeks to address.

Secondly, government approved ‘fair rents’ would simply be price controls.  I know of no economist who doubts the impact of said policy.  If prices are mandated by law to be beneath the equilibrium level where buyers and sellers would otherwise put it, supply is always reduced and can sometimes disappear entirely.  We can see recent examples of this where Mr Mugabe’s government tried to control rising food costs by fixing prices.  The result was empty supermarkets.

As a nation we tried this policy in 1977 with the rent act.  This lead to the virtual disappearance of the private rented sector and the bankruptcy of many then existing Landlords caught by the double whammy of price controlled rent and security of tenure for existing tenants.

Furthermore, because of the ruinous policy of QE, it is likely the coalition government will hand over an economy in the grip of serious (and under-reported) inflation with lots more in the pipeline for you to contend with.  Fixing rents for a period of time would exacerbate cash-flow problems for suppliers as repair costs, interest rates, income taxes, property taxes, service charges and the like all rose with inflation, but income did not.  This could lead to serious disrepair in rented accommodation as suppliers were simply unable to afford often expensive repairs.  Again we saw this in the 1970’s, let us learn from previous mistakes.

We must also consider the impact on the wider economy of such measures if they were implemented.  Some Landlords would leave the market and others would not enter it.  Supply of private rented accommodation would decrease but the amount of property available for sale would increase.  This may have a marginal downward impact in prices, though I do not believe it would be significant because the buy-to-let market is still a relatively small part of the overall housing market.  Nonetheless this could increase the stress on some banks already seriously exposed to bad property loans and it would make new build projects marginally less attractive thus reducing new supply and hurting the building industry.  Furthermore the already shaky confidence of UK consumers would be hit further by falls in their house prices.  The impact could be much more pronounced if Landlords who are not currently paying attention, stampede to the estate agents en masse if these proposals ever came before parliament.  This would cause an immediate bulge in homelessness that would be difficult to address.

Finally it is important to consider that previous Labour governments tackled homelessness by building council/social housing.  Given the likely dismal economic position you will inherit from Mr Cameron, this option will not be available in a meaningful sense.  Wishing it otherwise will not change the reality of conservative/liberal economic and financial failure.

The likely economic position in 2015

When Ed Milliband becomes Prime minister in 2015, the country will face economic problems that will dwarf anything before seen.  The staggering failure of the coalition to grasp the nettle is grossly under-reported.  Such a scenario will require new thinking as old solutions will simply be blown away by the harsh economic winds.  In addition to an unaddressed structural budget deficit, the national debt is likely to top £1.1 trillion.  The likely abandonment of the Bank of England’s 2% target for inflation in favour of the ludicrous nominal GDP targeting is a siren call for more inflation.  In 2015 the economy will clearly face significant inflationary pressures.  This may easily impact on interest rates and government finances may come under further pressure from increasing interest rates on the sovereign debt as it rolls over.  Thus more money to service the debt means less for policy objectives and we must also consider the very real possibility of sovereign bond auction failures as investors take flight.

An alternate approach

Such a scenario does however offer the chance to adopt a radical new approach that can work and to do this we must consider the counter-intuitive.

I have been in the market myself, both as a tenant and a Landlord and from both sides of the contract I can say that the best way to ensure security of tenure is to pay the rent and abide by the terms of the contract.  I have never yet evicted a tenant who met their contractual obligations nor do I know of a single Landlord who has.  “Blue-chip” tenants make a Landlord’s life easy and they are almost always keen to offer them a continuing tenancy for as long as the tenant wishes to stay.

The only tenants who are usually evicted are those vicariously breach contract or stop paying rent.  Even in statutory terms this is a long process.  It takes approximately two months to serve the notice ending a tenancy and a further month to obtain a possession notice from the local court if the first notice is ignored.  Once you factor in court delays, you can easily be looking at six months to evict a non-paying tenant.  Also the chances of obtaining the debt from former tenants are very limited.  Some tenants know this (or are advised of the same) and wilfully engage in mendacious behaviour.

This hurts them (CCJ’s mean they cannot obtain mortgage funds to ever buy a house), it hurts the landlords who faces unpaid debts and court costs running into thousands an it hurts the exchequer as Landlords do not pay taxes on unpaid rent.

So to give de facto security of tenure, implement measures which speed the eviction process.  This sounds counter-intuitive, but tenants knowing they face speedy eviction for non-payment would be strongly incentivised to pay the rent.  This would help their security, credit record and it would help the Landlord pay tax.  Crucially, knowing tenants could be evicted promptly for non-payment could encourage more Landlords into the market.  Of course this would increase supply, choice, quality, drive out rogue Landlords and critically, bring downward pressure to bear on rents.

Thus the objectives of more security and cheaper rents could be met, at no cost to the government.

It would take great courage and wisdom to adopt this position, but I commend it to you.

Yours Sincerely

7 Comments

  1. Mr Ed says:

    The Labour Party has always been intent on harm, and it has the rare distinction of actually having broken the Geneva conventions by abusing the Red Cross symbol by association in the period leading up to 1992 general election. The then Gen Sec of the party was duly convicted of a criminal offence in an English court.

    Unfortunately, I fail to see how pointing out to the error of their ways, intended or current, would help to moderate their aims, as deep down, I believe, they know that what they are doing, or proposing to do would be counter-productive, and thus a pretext for further intervention, such as the confiscation of property, as was enacted by the last government.

    Unfortunately, the national debt already exceeds £1.1 trillion!

    http://www.debtbombshell.com/

    Perhaps this will galvanise those who might not otherwise vote to do all they can to avoid a Labour victory.I have to say that in my view, anyone who votes Labour is revolting against civilisation.

    Can we all go to the Isle of Man please?

  2. Very good. If you are sending this as is TO The Labour Party, it’s “Miliband” not “Milliband”.

  3. Schrodinger's Dog says:

    SAoT,

    Indeed, indeed.

    I own a property in London which I rent out and I’ve found the exercise to be a great way of learning to hate everything and everyone. Bad tenants, low life letting agencies, I’ve suffered them both at one time or other.

    Happily, I now have a good tenant who doesn’t complain (much) and pays the rent promptly. And long may she remain my tenant.

  4. Single Acts of Tyranny says:

    SD ~ Likewise, I have a few rental units and if someone pays the rent they can stay more or less as long as they wish. I don’t even increase the rent if its marginally (i.e. 10-15%) sub-market, so keen am I to retain decent tenants.

    I’ve now gone through the court process twice* and never have I experienced such frustration, almost irrecoverable cost and endemic delay to enforce a simple contractual right.

    (* Not through choice, absolute last option)

  5. Owain says:

    Thanks for the heads up on that. I am writing to my MP (Labour) today – for what that’s worth – and since I’m in the rural sector also to the CLA.

  6. Paul Marks says:

    It is part of a broader economic (indeed philosophical) fallacy.

    A person looks at the world and notices that it is not perfect – that it is not Heaven on Earth.

    For example, that some people live in nasty conditions – and have to leave their homes (even horrible homes) when they can not pay the rent, or even when the landlord has a better use for the building.

    Research is then undertaken to show exactly how horrible things are – this research is then published (and publicity is done to spread the terrible news).

    Then the ASSUMPTION is made that passing more laws will improve matters.

    This ASSUMPTION is just flat wrong – indeed the consequences of the extra regulations will be to make things worse.

    For example, in this case, more regulations will not mean that people live in better conditions – on the contrary it will mean that more people live in cardboard boxes in the street.

    With minimum wage laws the idea is to increase wages – the result is to keep people unemployed.

    And on and on.

    Always it is the same…….

    People look at the word and see it is “not good” (indeed that it is very bad) then they ASSUME that state action will improve matters – and that there will be no hidden costs to the state actions.

    At bottom this view is that the state is GOD – and that the state can just act (by regulations or by government spending) to improve things, without any bad consequences.

  7. Paul Marks says:

    By the way SAOT is quite correct – if people want less expensive housing (houses and flats – for sale and for rent) then there is a straightforward way to do it.

    The government should stop what it is doing.

    It should stop QE – and all the other names for funny money from the Bank of England.

    Prices would CRASH.

    “So would the economy”.

    The economy is going to crash anyway.

    One thing that lying swine Putin’s boy Max Keiser is NOT lying about is that the British (and American and….) economy is going to crash.

    By the way – the best liars mix the truth with their lies.

    “The American economy is going to go down” is true.

    And people nod at this truth – nod so hard they let lies (such as “because people like Glenn Beck have stolen billions”) pass into their heads unchallenged.

    It is a old KGB tactic.

    Mix the lies in with the truth.

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