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What would happen if the Private Rented Sector shrunk by 50%?

January 14, 2015 by Tessa J Shepperson

Ben Reeve LewisBen Reeve Lewis contemplates the unthinkable …

Compiling Newsround each week provides the unique opportunity to see on a daily basis, the subtle changes in rhetoric, arguments, fads and faffs of ideas circulating in PRS land.

Some are simply classic examples of journalistic band wagon jumping while others are mapping the changing narrative of the PRS.

It’s a two way street. The press both reports on what is going on out there and at the same time feeds back into the discussion, fuelling the debate so it cant be dismissed, even when those articles are penned by organisations or blogs who landlords wouldn’t naturally agree with, such as Shelter, Jules Birch or Red Brick.

I’m prompted to write this piece by two things:

  • Recent comments to some other posts I have written,
  • The comments of one landlord on a training course I delivered to landlords in London a few weeks back.

Please dear reader don’t take what I am about to talk about as merely a puerile stirring of the hornet’s nest just for the sake of it; it’s a genuine open question.

What would happen if the PRS shrunk by 50% overnight?

What if landlords did what they always say they will and vote with their feet in response to the growing call for rent control?

When I mentioned the prospect of rent control on my training course, merely as a discussion piece one of the landlords became very animated and said that property prices would plummet overnight as landlords placed their portfolios up for sale. Supply for once trumping demand.

And this is a common response whenever the topic is raised. Landlords deserting the market in droves for sunnier financial climes.

My admittedly possibly reckless rejoinder being “Well that Peckham flat cant be moved to Dundee so it will still be available for someone in the community, albeit in a different form”.

The question being “In what form?”

Properties being scooped up as buy to let residences is in part driving generation rent. Maybe if those properties were more affordable many of those currently renting would be able to afford to buy, so is a mass exodus of PRS landlords such a bad thing to society as a whole?

People selling homes would be hit, people seeking to buy homes would be at an advantage. The pendulum swings.

For sure the housing landscape would change dramatically but in what ways?

In qualifying this inflammatory discussion (I am wearing my stab vest as I write) bear in mind that if this were to happen the system would have to readjust, so whereas the initial shock would leave a gaping PRS shaped hole, policies, practices and hastily redrafted legislation would quickly step in to not only rebalance the system but also to capitalise on the sudden glut of available properties.

Society’s attitudes to private renting and therefore it’s housing policies would change significantly to deal with the sudden revolution, which is exactly what it would be, a revolution in how we go about our housing lives.

A sudden mass get out by PRS landlords would create havoc in housing world for sure but I doubt that all the properties would remain idle for long.

Public reaction to a mass exit by landlords

Can you imagine the newspaper headlines if masses of tenants were evicted and property portfolios sold? The Daily Mirror would yell “End this scandal of empty homes”, while the Guardian runs “Homeless families increase as landlords turn away from renting”.

The Daily Mail would champion “Never been cheaper to buy a house”, while the Sun would run a competition to win three of them plus a 52” Flatscreen TV with home cinema system……….and a holiday in Florida.

Government would have to act. Would housing associations use their financial clout to buy en masse and rent out?

In truth many of the dissenting opinions about landlords getting out of the game are based on the system as it is at the moment, but systems change in response to social problems.

Things change …

It happened in 1989 when the Housing Act 88 was ushered in and trashed Rent Act protection, it can happen again when public opinion reaches critical mass.

Monitoring the press up to 12 months ago all mention of housing benefit straining the national debt placed the blame at the feet of the unemployed. Then it became apparent that despite cuts the housing benefit bill was rising as more working people claimed who’s wages weren’t keeping up with the cost of living and so the narrative started to change.

In the past 6 months I’ve been reading more and more pieces of analysis, from tabloids to broadsheets pointing the finger at PRS landlords for being the ultimate beneficiaries of housing benefit.

Last night I watched a documentary on BBC1 about the right to buy where the presenter raised this very point.

When a viewpoint starts getting repeated in the media any idea, in this case rent control, ceases to be a heretical one and with the recent announcement by right wing think tank Civitas that Labour’s plans for renting aren’t radical enough and calling for rent control you have to wonder if, coupled with the hotting up the impending election campaigns, critical mass may not be a long way off.

What do YOU think?

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About Tessa J Shepperson

Tessa is a specialist landlord & tenant lawyer and the creator of this site! She is a director of Landlord Law Services which runs Landlord Law and Easy Law Training.

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Comments

  1. Jamie says

    January 14, 2015 at 3:43 PM

    First of all, lets mention the obvious point – most of the talk about rent controls is because of London and areas in the South East. Most other parts of the country are operating within perfectly acceptable parameters in terms of rent levels.

    Rent controls are bad because it is an interventionist strategy that is really about tackling the symptoms without addressing the cause – which is chronic undersupply of quality housing. No matter how well-intentioned, such policies nearly always backfire and/or have unintended negative consequences.

    If half the PRS stocked was dumped, potential rental yields might increase as prices fall. This might encourage institutional investors and off-set their fear of rent controls. I doubt this would actually happen as the sector would be too unstable and unpredictable for those investors, especially with all the anticipated ‘hastily redrafted legislation’.

    If house prices dropped significantly there would be millions of additional homeowners (not just nasty evil landlords) in negative equity and this could have a massive negative impact on them and the wider economy.

    However you cut the cake, there are insufficient homes to go around so there will still be a housing shortage. Not everyone can get a mortgage even if house prices dropped dramatically, so who would house those people if half the stock disappears?

    Lower house prices can reduce housing investment by reducing the incentive for homebuilders and homeowners to invest in housing (Corder and Roberts 2008) thereby exacerbating the overall housing shortage.

    800,000 people on the London Councils’ waiting lists. An 84% increase over the last 10 years. Rent controls will do little to satisfy this level of demand.

    Rent controls would simply transfer the pain from one part of the market to another, the question is, which part of the market holds the most votes?

  2. Ian says

    January 14, 2015 at 4:07 PM

    I predict…

    It will become a lot harder for people to move for work. This will have a much greater effect on people from outside of the UK that wish to take up a job in the UK. The labour market will therefore before less flexible.

    House price may go down for a short time, but very soon they will return to normal as ex renters will have to buy.

    More property will be left empty when someone cannot sell or are working elsewhere for a few years.

    Lodger will be willing to pay more as there is not another option, therefore some people who can will buy houses with enough rooms to take in lodgers while avoiding more of the laws that have driven away landlords.

    The landlords that care the least about keeping to the law are most likely to ignore the new laws, while the “better” landlords decide to sell.

    Many more people will have their homes reprocessed by mortgage companies they were forced to buy when they know there income was not stable over a long term.

    None of the above will happy quickly, as properly investment is long term. While all of this is going on, we will STILL not build enough new homes….

  3. ken mayo says

    January 14, 2015 at 5:24 PM

    It is fairly obvious what the problem is – there are too many people concentrated in one area – why should the councils pay the rent for someone who lives in an area of high value housing when there are thousands of houses empty in the midlands and in the north of the country including places like Liverpool.

    These are low cost housing that would meet the need of and save the councils substantial money – this would also free up housing in desirable areas for those that contribute to the wealth of the country and require housing to be near their jobs.

    To control rents would create a lot of bankruptcies to many landlords who have one or two properties where the rental income assists with their pensions.

    Why do people have to meddle when the status quo is, for the majority fine, and why do people think that the world owes them accommodation that they have not worked or saved for?
    Do they not realise that being a landlord is as hard a job as any other and has immense risks without adding to them.

    Leave well alone, I know that you have to justify your existence to continue to get your income through the housing market but you should be careful as if you make everything perfect you may not have a job and will be looking for cheap accommodation.

  4. Tessa Shepperson says

    January 14, 2015 at 5:38 PM

    Its not just a question of people limited income wanting to live in posh areas.

    Poeple in those posh areas will no doubt want to have teachers in their childrens’ schools, people to empty their bins and work as waiters in the local restaurants, etc etc.

    If only people with a high income can afford live in an area – who is going to do all these low income jobs? They can’t all commute in from the Midlands – for a start they probably would not be able to afford the rail fares …

  5. Jamie says

    January 14, 2015 at 5:49 PM

    Unfortunately Ken, it is no longer politically correct to expect the UK to have a mobile workforce although mainland Europeans seem to have no problem with it.

  6. Jamie says

    January 14, 2015 at 5:57 PM

    Tessa that’s maybe over-simplifying it a bit.

    But if the wealthy have no waiters in their posh restaurants or no one to teach their kids then isn’t that their problem? Perhaps they’ll have to pay more if no one turns up for work.

  7. HB Welcome says

    January 14, 2015 at 6:58 PM

    Ben,

    No one credible is seriously proposing true rent controls.

    Labour’s rent control ‘lite’ is political posturing which they will backtrack on that if they come to power as they will have already worked out the consequences.

    It certainly wouldn’t happen overnight.

    But lets pretend the wet dream type rent controls of the vocal minority did happen overnight.

    90% of my tenancy agreements could be done on a handshake, irrespective of what the law says. So for those tenants I would just let it ride.

    The 10% I don’t trust enough to not take advantage, I’d get rid of.

    Then, over time, I would adjust my portfolio accordingly. Buying, selling and adapting to fit the new circumstances.

    Using your Peckham flat as an example;

    I’d move in, pay the council tax and all the bills and declare it as my PPR. Do it to a well maintained, very high standard and kip in the box room.

    I’d then take in a lodger, all inclusive, extra services provided. And charge well above the rent control slum rate for the privilege.

    No problem with their partner staying over as much as they want as I will mostly be staying in my recently bought bargain seaside flats in Brighton doing holiday lets.

    When I’m not overseeing the running of my recently bought and converted B&B’s, used to house those unfortunates that are less than 100% perfect who can’t get a rent controlled tenancy.

    Or a hundred and one of the other legal ways that would be found around it.

  8. HB Welcome says

    January 14, 2015 at 7:16 PM

    “People in those posh areas will no doubt want to have teachers in their childrens’ schools, people to empty their bins etc etc.

    If only people with a high income can to afford live in an area – who is going to do all these low income jobs?”

    Tessa,

    If they get that desperate, I’ll pick you up from Norfolk in my bin truck. You teach their kids, I’ll empty their bins.

    We’ll charge them accordingly and then knock off for the rest of the year.

    It will work out fine until some bright spark suggests price controls on private education and private rubbish collection.

  9. MMC says

    January 14, 2015 at 7:33 PM

    Ben thanks for depressing me further. Where are you and Tessa going this week on the topics? Just to remind you that more than half of us are not in London and are still in negative equity, we can’t sell. We will have to cope with what is inevitable.

  10. Ben Reeve Lewis says

    January 15, 2015 at 8:43 AM

    Interesting views folks but you have all fallen into the same trap….the one I was trying to emphasise with the article.

    I already know what landlords feel about it and what they would do because they tell me all the time. My point was what do you think government, housing associations, property developers, mortgage products would do in response to a mass get-out by landlords?

    Government would have to respond and in the interests of business would mortgage lenders develop a range of products to enable people to snap them up as homes rather than investments?

    Thatcher introduced the Housing Act 88 in part because it was widely reported in the press at the time (I was working in homelessness) that homes were laying empty because landlords thought there was too much regulation deterring them – so the government changed the law.

    Some of you feel this is a London & south East centric argument and you are right in the main but it is wrong to dismiss it….12 million people live in the capital and countless millions of others in the surround counties. The biggest concentration of the population, it is bound to be a driving factor

  11. Colin Lunt says

    January 15, 2015 at 12:06 PM

    As a home owner I would like to see property prices fall because the freedom of the market has created the ludicrous situation that the ratio of needed income to property values in some area is up to 10 to 1 whereas it used around 3.5 to 1.

    Professional workers after a couple of years of employment, as has been mentioned above ought reasonably be able to purchase a property if they want to do so. Some 30 years ago reasonably paid manual workers with a trade and permanent contract could buy.

    No one has the guts to allow property prices to fall. We the taxpayer bailed out the banks because they were considered essential. The Mortgage Rescue Scheme hardly helped anyone. What helped was the change in the CPR and the role of judges. It ought to be possible to create a system of owner occupiers being given protection from negative equity.

    If rent controls were reintroduced there would be transitional protection in the same way that there was in the change from Rent Act to Housing Act. It is unlikely that there would be a sudden extra mass of properties for sale as the financial situation of landlords and equity in property will be different. While some will be highly geared (income to mortgage) others will be low geared.

    If properties were left empty then councils may use powers under EDMOs, hopefully enhanced, as the present exemptions allow landlords to avoid the Council’s powers. There are some six or seven grounds that a landlord can oppose an Order. There are very few EDMOs that have been used except where owners have not been traceable or are very uncooperative. Many properties have been brought back in use when a landlord has been tempted by direct grants.

    One council in west London is now borrowing on the money market and making cash offers for properties that mean an owner gets a quick sale. The council has set up a new legal entity company so that although the properties will be let at reasonable rents, will not be regraded as a “council let” and will not be in the Right to Buy regulations. Creative thinking

  12. Jamie says

    January 15, 2015 at 4:05 PM

    From memory (correct me if I’m wrong) I think there are roughly 4 million properties in the PRS.

    If 2 million of them were dumped on the market in a relatively short space of time, the effects on the housing market and the wider economy would be huge. You wouldn’t be worrying about what investors or housing associations are doing. You’d be too busy worrying about the next depression.

    But this isn’t going to happen because most politicians generally appreciate the consequences.

    Conservatives won’t implement rent controls full-stop and although Labour have promised 3 year tenancies there are no limits on the opening rent. Subsequent rent reviews will be capped but they conveniently don’t say at what level (RPI maybe?).

    Landlords can just re-negotiate a much higher rent at the end of year three if they really want to, but in my experience most landlords don’t inflict massive rent rises on their tenants anyway.

    No one is going to implement full blown rent controls and Labour’s watered-down version won’t really benefit tenants or have a massive effect on the market.

  13. HB Welcome says

    January 15, 2015 at 5:34 PM

    What would a government do in response to the consequences of them being batty enough to introduce full rent controls?

    A quick U turn. Amongst many other reasons, because mortgage lenders won’t suddenly start lending to no deposit, high risk profile tenants and housing associations can’t even cope with the current amount of demand for housing.

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