Labour’s rent control plans are pointless

Ed Miliband’s proposals on rent controls sound pretty innocuous. Read them through and you might not find yourself much bothered. The idea is not to completely control rents (as with primary rent controls), but to make default tenancies three years long.

Landlords would be able to set the rent as they liked at the start of the tenancy, but after that, they could only rise in line with some sort of average (Miliband hasn’t specified exactly what this would be).

After three years, the landlord (who can end the tenancy during the three-year period if he wants to sell or live in his house*) can again set the rent as he likes.

This system, as the IEA points out, is pointless as a policy in that it doesn’t actually interfere with market rents: all landlords would simply charge a slightly higher price at the beginning to reflect their lack of ability to put their price up over a three-year period.

So, rents would be more predictable over certain periods – which might be nice, although most tenants would say that once they are in, their rent is already pretty stable – but in the end, they would be no more affordable.

From the point of view of the Labour Party, says the IEA, this is perfect. Right now politicians face a “formidable challenge”.

On the one hand, the housing shortage is so severe it can no longer be ignored. But on the other, the anti-development groups alongside homeowners relying on rising prices are an electoral force no one can afford to ignore. That means politicians need policies that fulfil two criteria.

First, they “must attract a lot of media attention”. And second, they “must be perfectly useless at improving affordability”. This policy, rather like Help to Buy, “ticks both boxes.”

However, while this all sounds perfectly harmless when you look at it like this, it might not be so simple. Real rent controls are a disaster – I’ve looked at all the reasons why here  (the main one being that they limit supply when the answer to housing shortages is more supply) – and bringing them back into conversation sets, as Capital Economics point out, a “worrying precedent”.

Right now, what the private rental market needs more than ever is private institutional investment. If the government gets a taste for intervening in rental markets, or even much more media attention on the matter, it is highly unlikely to get that institutional investment – something that would be “bad news” for the very renters Labour claims it so wants to help.

* One of the genuine problems in the UK rental market is short-term tenancies. However, this isn’t always something one can blame on landlords, most of whom would love to have long and stable tenancy agreements.

Instead, short agreements are usually demanded by mortgage lenders who want to be sure that properties can be emptied quickly if they want to foreclose.

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39 Responses

  1. 08/05/2014, Greg wrote

    One of the main problems with our housing market is Buy-To-Let.

    The Government should scrap BTL mortgages which create additional demand for housing, push more into rented and result in higher housing benefit bills. They also need to provide greater security of tenure for tenants in order that they may be able to make a house a “home” – this would help to deflate the house price bubble without needing to increase interest rates and would hopefully change the nation’s attitude to renting and obsession of home-ownership as an “investment”. We should also be building far more council housing (rather than financing private landlords’ mortgages via housing benefit) – and arguably instead of HS2. AST clauses are inherently weighed in favour of the landlord in order that the lender can action a forced sale within 6 months if required – we should instead be encouraging private institutions into the private residential letting market where they can re-invested profits and company pensions in residential property as a long term investment and hence providing longer tenancies and security of tenure for the tenant.

    At the moment tenants and the taxpayer are effectively funding the mortgages of millions of BTL landlords via rent, housing benefit and providing them with capital growth partly caused by taxpayer subsidised Help-To-Buy mortgages and the increased demand caused by the housing benefit itself. There is also a very unfair ‘playing field’ where BTL investors can apply for interest-only mortgages (unlike FTBs) based on the rental income as opposed to their own income, and there are many unfair tax advantages too. Some might argue that scrapping BTL mortgages would result in fewer homes available to rent, which is true, but the lower demand for housing by investors would result in more people being able to afford to purchase a home. At the end of the day there are the same amount of homes available – it’s just the investors who price them out by reinvesting the equity they have accrued in their own homes and investing savings and pension pots.

    I also think that Council Tax should be scrapped. There should be a new Land Value Tax to replace ALL current property taxation and inheritance tax (pensioners would pay LVT from their estate upon death) – an LVT would encourage a greater supply of homes, ensure land is used more efficiently, deter land banking by developers and speculative purchases on prime residential property by foreign investors and the proliferation of under-used second homes, and could be used as a tool to manage house price inflation instead of interest rates. The LVT would provide regular income for the Treasury to pay off National Debt (not dependant on property transactions nor distorting the market unlike Stamp Duty).

    We also need more housing with owner restrictions, specifically for local people and those in essential services. These should form part of new planning permissions for “affordable housing” – particularly in urban areas and “honeypot” coastal and rural towns where average land values are considerable out of sync with average incomes. By restricting the potential house buyers and preventing investment purchases and second homes, the demand would be restricted and therefore keep prices lower and therefore more affordable than other housing in the area.

  2. 08/05/2014, mr clyde wrote

    Greg-some of your points are valid but you have got BTL all wrong. BTL accounts for around 12% of the housing stock and is a mugs game (with 20 yrs experience I should know) until, that is, the property is sold for a capital gain. That capital gain comes from the 88% willing to pay anything to jump on the politically ramped, CGT free escalator that is our property ‘market’. Charge CGT on all property and there will be more reasonably priced houses for all, to both buy or rent.

    • 08/05/2014, Greg wrote

      Mr Clyde, I disagree. Charging CGT for primary residences will only reduce supply further as it will deter many from moving. A Land Value Tax to replace all property taxation is the only answer. BTL might only account for a relatively small percentage of purchases but it’s an unfair playing field and pushes prices up. Plus brokers and estate agents are encouraging people to take out BTL mortgages instead of a conventional mortgage as it’s more affordable (interest only) and can often mean that they can then get the loan amount they require – BTL is another “sub-prime” time bomb waiting to happen…

      • 09/05/2014, Charles wrote

        Land Value Tax would perpetuate ghettos. I commend all value added by planning permission is taxed by the increase in value paid by the owner of the land/property benefiting from the change of use. This should mean that where society has created value society benefits. If a property is subsequently sold that has been subject to this tax it then becomes an open market sale setting the parameter for the tax for change of use going forward. Local authority coffers are then filled for redistribution of wealth.

        • 10/05/2014, Greg wrote

          Charles, I think the current situation is more likely to result in ghettos. Not sure how your planning permission added value tax would work particularly that the Government are looking to increase permitted development and it would discourage development. We should be taxing the land the buildings sit on not the buildings themselves. You can be creative with the buildings and add value but I don’t see why that should be taxed – it would be a disincentive to creativity.

          • 11/05/2014, Charles wrote

            It is the creativity with the development/building that is legitimate return, land value increase due to change of use is something society confers and is a big source of corruption and unwarranted exercise of power and theft from society.

            • 11/05/2014, Greg wrote

              Exactly! Therefore a Land Value Tax is the answer!

              • 12/05/2014, Charles wrote

                Land value tax as an annual recurring event would be a disincentive to invest if it means you would be improving an area- surely? That would not seem fair to me. If a neighbour sought permission to do what you had done and there was a perceived increase in value because of the permission, this value would be captured in the planning permission tax. The developer would be further improving the neighbourhood and if you as an innovator in the area benefitted on sale you would make money as is your due.

                • 14/05/2014, Greg wrote

                  LVT would not simply change overnight due to your developing/improving. Home improvements would add value to the building not the land – only where there is an increase in demand for that land due to new taxpayer funded infrastructure such as roads and railways, for example, or other private investment which makes the area more desirable. Only when the value of the land increases would you pay more tax – and that seems fair as your land has increased in value due to Government & private investment – why should you expect to keep the windfall?

                  • 15/05/2014, Charles wrote

                    Any tax has to be based on affordability. Your LVT would tax away developers profits. They invest for this increase in value you talk about. My one off tax at the grant of planning stage captures your infrastructure and private development improvements of an area while leaving the developer with future growth as his reward on sale. Anyway aren’t council tax and business rates already a LVT type of levy? My idea might encourage councils to think more about maximising use of land to maximise permission tax.

            • 11/05/2014, Greg wrote

              I see where you’re coming from regarding change of use – however valuing each individual application could prove expensive, prolonged and difficult – we should be speeding up the planning process not hindering it. Perhaps the Government should compulsory purchasing land outlined for housing/development at agricultural prices and then selling/auctioning this on to developers (including self-builders) pocketing the increase in value (towards National Debt) or to pay for new council housing?

              • 12/05/2014, Charles wrote

                Those were the lines I was thinking along. I don’t see that a planning permission tax need be negotiable, it would be carry on with your development or drop it. The proposal will be on record for other developers to proceed should they wish, the main thing is change of use does not become a scenario for corruption and unwarranted gain. Anyone can apply for planning permission, they don’t need to own the land so the tax would be an upfront cost to build in.

                • 14/05/2014, Greg wrote

                  I personally think that anything which taxes the buildings and the planning for those buildings rather than the land they sit upon would be a disincentive to develop/build/improve. Yes, there are good arguments for previously un-developed land (e.g. Green Belt agricultural) to be taxed for “change of use” – but I see the best way of doing that would be via the Government using compulsory purchase powers – purchasing at agricultural prices plus some compensation and then auctioning it to developers, using the proceeds to pay off National Debt and to build new council homes.

                  • 14/05/2014, Charles wrote

                    Wouldn’t that introduce two new transactions with the council/government. I was thinking the District Valuer would assess the Change of Use tax. How would your system deal with detached house plot getting PP for 50 flats? Garden centre for housing estate? Warehouse to residential? Pub to flats? House to shop unit? etc. etc.

                    • 14/05/2014, Greg wrote

                      An LVT would encourage the most efficient and economical use of land but your system would not – it would discourage redevelopment and change of use by taxation and would be extremely costly and prolonged to administer and virtually impossible to accurately calculate, whereas a LVT would be relatively easy to administer and calculate (via Land Registry values).

  3. 09/05/2014, mr clyde wrote

    Greg – I not sure I understand how ‘not moving’ reduces supply, but what certainly does remove supply is building a 5/6 bed ‘mansion’ on a plot instead of 3 or 4 ‘affordable’ homes which is what a friend of mine does because his margins are far bigger. This is not because there is a glut of large families, but a the high expectation of the purchaser to make a significant tax free gain. If we want to optimise the housing stock, Home-owners need to be incentivised to stay unless a move is a necessity, and, if they wish to invest their surplus capiltal in property, invest it in homes for others not themselves – to rent or buy. As an aside, my bank BTL loans are 2% higher than ‘normal’ mortgages and I can assure you that the tax reliefs available on lettings are entirely justified by the extra costs of voids, repairs, arrears and management fees incurred.

    • 09/05/2014, mr clyde wrote

      PS – apologies for the typos

      • 09/05/2014, Ellen12 wrote

        Mr Clyde, I cannot agree with you on this. I do not think there should be any disincentive to moving home. Change is a normal part of living and I have read you posts suggesting an end to punitive stamp duty charges, and have agreed with you, because this tax does not facilitate the changing circumstances of peoples lives.

        I really think BTL has become a serious obstacle to the chances of young families and individuals buying their own homes and measures need to be taken to discourage BTL, through the tax system, while we have an obvious shortage of starter homes. That said, I do understand the reason BTL has become more mainstream than deposit accounts and do not blame those who own a BTLs but rather the policies and policy makers who punish savers and artificially prop up house prices.

        • 09/05/2014, mr clyde wrote

          Ellen – I absolutely agree that there is an awful shortage of starter and affordable homes and that every family/single should have the opportunity to buy and/or securely rent a home of their own – which they don’t have at the moment. But it isn’t the fault of BTL. I suggest you take a look at the Sunday Times property section – reams of full page ads for top-end new-build houses and apartments. Where are the starter homes? (ans – see above). I am not suggesting we should disincentivise moving house. I am suggesting we should disincentivise buying properties bigger than we need.

          • 09/05/2014, mr clyde wrote

            …in fact not even disincentivise buying bigger properties, merely remove the current incentive to do so.

    • 09/05/2014, Greg wrote

      “Supply” not only refers to the amount of new homes but also second hand ones coming onto the market – if there are more houses for sale it will mean there is more choice and less people chasing each property so less pressure on prices. By charging CGT on principle residences there would be less incentive to re-develop property or move.

      In order to achieve what you are advocating (building 3/4 ‘affordable’ homes instead of a mansion) the answer is a Land Value Tax – that is the only form of taxation that encourages efficient land use, deters ‘land banking’ and does not distort the market unlike Stamp Duty.

      Tax reliefs on BTL mortgages are totally unjustified – why should a BTL investor be able to get tax relief for a new boiler, repairs and maintenance and have an interest-only mortgage based on projected rental income (not their own income) and have their mortgage financed by housing benefit at the tax payers’ expense?

      That is not fair and BTL simply drives up prices and prevents potential FTBs from ever owning their own home – they will be stuck in various insecure ASTs, never allowed to redecorate as they wish, never allowed to have pets, never allowed to make their temporary house a ‘home’….

  4. 09/05/2014, Jago wrote

    HI Greg

    You seem to be blaming Landlords for the large increase in property values.
    You have written that by reducing the BTL would reduce the price of housing.
    Well I believe it would only have a very small effect on the price of a house.
    There are many factors that have contributed to the ridiculous prices people in the southeast are expected to pay. Population increase, people are living longer, more people get divorced, more people working, planning restrictions.
    In other euro countries they have a higher percentage of rented accommodation and lower house prices relative to income. I think the biggest single cause of the house price increases is successive governments Labour and Conservatives reducing the credit control allowing people to borrow a higher multiple of their incomes therefore pushing up the price of a house.
    Under the Thatcher Government the then Chancellor Geoffrey Howe reduced the credit controls and the consequence of this was a huge rise in house prices, causing many people to get stuck in negative equity.
    This was at a time when immigration was very low and there were few Landlords about.

    Jago

    • 09/05/2014, Greg wrote

      Hi Jago,

      Like Ellen12 above, I am not blaming Landlords but the policy makers – you cannot blame people for buying properties to let out with all the tax advantages, capital growth and low interest rates in savings accounts. However BTL is one of many factors which have contributed to house price inflation, some of the others you have correctly pointed out.

      In other European countries they do not have our crazy short term ASTs, tenants have greater security of tenure and can make a house a ‘home’, residential property is therefore regarded less as an investment and more as a place to live, with renting regarded more favourably as a form of tenure by the population.

      FIAT money – the banks ability to create money – has without doubt had a massive impact on the money supply and therefore house price inflation. Allowing private individuals to re-invest the equity in the home in more houses, getting an interest-only mortgages (based on projected rental income rather than their own) has also contributed to the increase in demand for housing – particularly smaller homes that are all ready highly sort after by FTBs, divorcees and retired people.

      Although people seem to be blaming immigration as one of the main problems, it’s our lack of house building, land banking, Green Belt, planning, short-term tenancies, ease of credit, cheap credit, BTL, proliferation of second homes, empty homes, property taxation, our attitude to housing as an investment/pension ….

  5. 09/05/2014, Jago wrote

    Greg

    I would also like to say that I think your assessment of Landlord tenant relation is a deliberate negative one as the vast majority are of a good nature.
    In the 1970 I tried to rent accommodation and it was almost impossible to do so.
    The then Labour Government bought in a load of restriction on private Landlords i.e. rent controls and security of tenure and it was a complete disaster.
    Many landlords gave up on their investments and the houses simple became slums. The problem being that once the government had over regulated the market they completely failed to provide a state sponsored alternative. There is little doubt that if your suggestion were implemented the situation in the long term would be far worse than it is at present
    The only solution is to build more housing association Properties, council houses and private housing both for sale and rent.
    Please bear in mind that the average return on a rented property in the southeast is between 3 & 4% after expenses. It is in the Landlords interest that a tenant stays for at least 3,4 or 5 years.
    Also it is not in a Landlords interest to achieve huge capital gains, as this will be taxed at 40% when it is sold wiping out many years of rental income.

    Jago

    • 09/05/2014, Greg wrote

      Jago,

      ASTs are weighed heavily in favour of the tenant – they are not an ideal form of long term tenure – only useful for transient accommodation – for a temporary contract or whilst looking for a permanent home.

      When I sold my last house it was a real struggle to find somewhere (nice) that would allow pets and then we were given notice as the landlord wanted us out so she could let the place for holidays over the summer to make more money.

      Our next rented house had mould and ivy growing up behind the skirting boards. We were good tenants and paid our rent on time but again were given notice as the landlord had bought next-door and obtained planning to re-develop the site. We had to move 3 times in 3 years – not ideal and each move incurred expenditure.

      BTLs are exploited – they are used to finance second homes, holiday lets, property developments and principal residences where the purchaser has no intention of letting the property to a long term tenant – yet the self employed and FTBs will often struggle to buy any house – and even if they manage to they will not have the many advantages of the BTL investor – the tax savings on the renovations & maintenance nor the interest only payments.

      Landlords can also “flip” their principal residences thereby avoiding the 40% CGT.

      BTL was created by the Conservative Government and then embraced by New Labour and the present coalition. It is considerably unfair system, with tax payers’ money (housing benefit and now Help-To-Buy) subsidising private housing – it contributes to a mal distribution of wealth and makes housing less affordable for all.

  6. 09/05/2014, mr clyde wrote

    Well Greg – I can definitely agree with you that the current mess is the fault of the policymakers, and that you can’t blame people for trying to play (legally) the system to their own advantage – but we vote for the policy-makers! As for owning Lettings, all I can say is that I am glad I am now well out of it, but would go back for all the houses in London.

  7. 09/05/2014, Charles wrote

    Why not ban the building of houses for homeownership forcing rich people to rent until the proportion of housing stock of the poor/rich ratio equates to the tenant/owner ratio. This would force up rents maybe in certain areas and the builders would have a hard job tailoring to the renters but eventually there would be more rental stock that is cheap enough with more property maintenance firms to look after the rental stock.
    This strategy might also cause empty / derelict property to be rapidly bought up as being eligible for homeownership.

  8. 12/05/2014, Angela wrote

    What the UK rental market needs is managing agents who actually know the existing landlord and tenant laws, and do not routinely commit trespass and breach of contract. I have been astonished by what top price agents believe they are allowed to do to tenants who are paying their rent and quietly enjoying their homes.
    Laws already exist to protect the private tenant, but due to many years when they were a rarity, this body of law has been almost completely forgotten.
    Legislation to require professional standards of all letting and managing agents would resolve many problems.
    Banks making BTL loans need to supply prospective private landlords with an outline of their legal rights and obligations when making the loans,, otherwise they are complicit in bad practise.

  9. 13/05/2014, Londoner_Ag47 wrote

    The “problem” seems to be caused by those who take advantage of the various offers, benefits and allowances.
    However, I cannot see that any opinions expressed here will be considered by those we elect to government.
    Rather, it seems to me, those in power will implement new schemes or tinker with old schemes in whatever way that they believe will ensure them the most votes at election time or the best seats on certain boards if re-election proves unsuccessful.
    And, further more, this will be at taxpayer ( you and me alike) expense.

    • 13/05/2014, Charles wrote

      Vote UKIP! I think Nigel is advocating a root and branch slash at the establishment to get somewhere nearer productive entrepreneurial activity instead of the gravy train of the current system.
      I can’t stand the way the system is skewed to cream off the nations wealth including through BTL.

      • 13/05/2014, Ellen12 wrote

        What are UKIPs policies on housing? I think this will be the defining issue in the next election. Too many people are being kept out of housing and, with Conservative policies of restricting supply and increasing demand, it is set to get worse.

      • 14/05/2014, Greg wrote

        I wouldn’t trust UKIP or Mr Farage with a barge pole!!!!!!! They don’t even have a manifesto, yet the policy ideas spurted out from some of their candidates is truly worrying! I doubt they (mostly ex-Tories) would stop the “creaming off of the nation’s wealth through BTL”.

        The Green Party is the only party (as far as I am aware) with a sensible housing policy and advocates the replacement of current property taxation with a Land Value Tax and greater security of tenure for tenants.

  10. 14/05/2014, Charles wrote

    Ellen12 : From the 2014 UKIP Manifesto:

    • Green spaces should be protected – we oppose excessive
    housing development, wind farms and HS2
    2. Regain control over development
    Our housing, education, health and social services cannot cope with
    constantly rising numbers of people coming to live and work here. The
    government is now riding rough-shod over local people’s wishes with mass
    house building that has become a ‘Developers’ Charter’ – without the new
    services to go with it.
    Environment, Planning and Housing: Reduce the pressure on housing by
    ending open-door immigration. Oppose the bedroom tax, but provide incentives
    to re-use empty homes. Protect our green spaces by directing new housing and
    business developments to brown-field sites. Stop preferential treatment to special
    groups such as travellers – rules should apply equally to us all.

    • 14/05/2014, Greg wrote

      Farage claimed on Question Time the other night that his party doesn’t have a manifesto! They are clearly not a party to be trusted – particularly when it comes to protecting the environment judging from the fact that they don’t like wind farms but favour fracking. They make out all our housing problems are due to EU immigration – they are not – they are due to a flawed housing market and not enough new homes – opposing “excessive housing development” doesn’t sound encouraging – just more NIMBYism by wealthy landowners. …and travellers do not have preferential treatment, however they need somewhere to go otherwise UKIP would be grumbling that they are pitching up outside their country piles!

  11. 14/05/2014, quark wrote

    Selling off Council houses was a wicked idea to get Margaret Thatcher re-elected, leading to a shortage of affordable family homes. The Labour party feasted on the feelgood factor caused by rising property prices. Rising property prices were caused by a credit boom, which Labour did nothing to stop. Unaffordable rents are a direct result of this boom. I lay that straight at Labour’s door! Not BTL landlords. Now the Tories are ramping prices up further. Milliband wants to introduce rental controls, because the trebling of house prices under Labour caused unaffordable rents. It won’t work. It will just mean the return of Rachmanism and a shortage of rented accomodation.
    Maybe I read the wrong newspaper, but where are the affordable homes for first time buyers? All I see are “luxury apartments” or expensive houses for sale.
    The housing market is a racket fuelled by financial services and encouraged by all Governments.
    Nothing will ever change. Milliband like all politicians, is an opportunist and Govt interference always has a perverse effect.
    I speak as someone who lived in a rent controlled flat for 17 years. It was a dream for my parents all those years ago, to buy a house, which they could not afford to do. Ever.
    Take a visit to Islington, where the Labour Party intelligensia have their homes. These hypocrites are living in homes which were once rent controlled, but where the landlords bribed their tenants to leave, or forced them out, for a relative pittance. Milliband is too young to remember.

    • 14/05/2014, Greg wrote

      Quark – I concur about Right-To-Buy and Labour – I don’t believe rent controls are the answer. More secure tenancies are needed, though, with longer terms, and combined with an LVT, scrapping BTL, building more council houses (instead of HS2), getting more companies to invest in residential, deterring people from leaving houses unoccupied, building more private homes, changing our attitude to housing (as a place to live rather than a pension plan) and by making renting a more attractive form of tenure we might achieve affordable housing (to buy and to rent) for everyone. I would also like to see 21st century contemporary eco architecture with reasonably sized accommodation and not boring tiny environmentally unfriendly pastiche boxes.

  12. 19/05/2014, camholder wrote

    For me the real answer is both simple and very difficult to implement, we need business to spread out across the country rather than concentrating themselves in the South East.

    London has become a vortex, I doubt we could ever build enough housing (and infrastructure to support the people who live in that housing) to satisfy demand as long as people think London is the place you have to come to to find a decent job. Housing in the rest of the country is more affordable and we could revive northern and Welsh cities this way.

    • 20/05/2014, Charles wrote

      Did you see that documentary on HS2? It was very good and concluded that if the high speed link between Leeds and Manchester was built before London-Birmingham it would create a vibrant business area similar to London. People are attracted to vibrant communities and Leeds-Manchester would create the size required for things to start sparking off in the North.

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