Thus began a prolonged squeeze in the country’s private rental sector, culminating in the rental property drought this summer.
Despite the continued political missteps that have gotten us to this point, there are still practical steps the government can take to ease the pressure. But time is running out.
In a very literal sense, tenants are paying the price for a succession of policy mistakes. Rents in London are already 19% higher than pre-pandemic levels, and many would-be tenants across the country are struggling to find accommodation at all costs.
That’s largely because many owners have responded to longstanding tax and regulatory nudges by selling. A survey by industry group Propertymark suggested that the number of properties available to rent fell by 49% between March 2019 and March 2022. It also indicated that 53% of rental properties sold in March left the private rental sector completely.
Economists at the Bank of England at the University of York have insisted that such a sale should make no difference to rents, as more landlords would mean fewer tenants. Unfortunately, this calculation does not quite work. Rental buildings generally house more people than owner-occupied ones. And while all buyers can rent, not all renters can afford to buy.
Yet other measures to deter homeowners soon followed the 2015 budget. In 2016, a 3% surtax was applied to all real estate purchases by homeowners. Residential owners are now also subject to higher rates of capital gains tax (CGT), while owner-occupied homes do not attract CGT, regardless of value. Even cryptocurrency earnings are taxed at just 10% for low-income taxpayers and 20% for higher-rate taxpayers. Owners’ earnings, however, are taxed at 18% and 28% respectively.
In June this year, the government published a well-meaning white paper entitled ‘A fairer private rental sector’, which among other things aimed to make it harder and more costly for landlords to evict tenants. This proved to be the last straw for many owners.
But as is now clear, tenants have been hit much harder than anyone else by these measures.
The fundamental problem, of course, is that national and local governments have failed to meet their supply commitments. Interventions such as the various purchase assistance programs and the aforementioned tax measures against landlords have either increased the demand for homeownership or decreased the supply of properties available for rental. The two conspired to drive up rents.
Reversing these tax increases is unrealistic, however, given that taxing homeowners is one of the few issues that unites an otherwise polarized electorate. At the same time, even if there were the will to tackle the shortage of social housing, it would take many years to bear fruit.
A more pragmatic approach would be to look at the issue from the owner’s point of view. (Here I have to declare an interest, as I have rented properties in London and Sheffield.) As we age, many of us find ourselves with less appetite for financial complexity. With lower yields and increasingly convoluted administration, owners are managing to sell sooner than they otherwise would have. And when they do sell, with fewer young owners to replace them, only a minority of those properties remain available for rent.
One way to avoid this loss of supply would be for the local or even national government to assume the management of these properties under long-term leases.
The government would pay landlords a rent set by reference to market rates, but somewhat reduced to reflect the fact that local authorities bear the bulk of the responsibility for renting and maintaining the property. Tenants would then pay the social rent chosen by the government. This would allow the government to quickly control a significant number of properties, without the capital expenditure involved in buying or building them. This would also facilitate supply management. Meanwhile, landlords would receive stable rent and a viable alternative to simply selling, ensuring continuity of supply to the social housing sector in a cost-effective way.
Optically, this would counteract the unnecessary “rogue landlord” narrative and give tenants greater security of tenure, while increasing competition in the rental market as a whole.
It is not a chimera. Local governments have, on occasion, used precisely this vehicle, albeit on an ad hoc and discreet basis. The real problem, beyond awareness and appetite, is that pressure from the national government has caused housing allowances to increasingly lag behind market rents. This has made these leases financially unviable for many landlords.
Another idea is to change tax incentives around donations. There are significant estate tax incentives for leaving charitable donations in your will. A slight change to these, and the creation of a national social housing charity, could provide aging landlords on these long-term leases with a tax-efficient way to donate properties to the social sector in perpetuity.
What is clear is that many of the assumptions about owner behavior are wrong or just plain wrong. If pushed far enough, owners leave the industry and that has an impact on the real world.
When it comes to tenants, many come to the uncomfortable realization that the only thing worse than having to rent from private landlords is no longer having private landlords to rent to.
More other writers at Bloomberg Opinion:
• Britain needs a better Covid recall strategy: Therese Raphael and Sam Fazeli
• Sterling markets are looking for a bruise: Marcus Ashworth
• Can Switzerland remain neutral in the face of Putin’s fascism? : Andreas Kluth
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Stuart Trow is co-host of “Money, Money, Money” on Switch Radio and author of “The Bluffer’s Guide to Economics.” Previously, he was a strategist at the European Bank for Reconstruction and Development.
More stories like this are available at bloomberg.com/opinion