Opinion: Tinkering politicians will only trap landlords for years to come

Margaret Thatcher is credited with the Right to Buy legislation which allowed long-term council tenants to purchase their homes at a discounted price.

This piece of legislation was great politics and dreadful housing policy, as it has robbed the UK of the pool of low cost social housing stock which we now so desperately need, particularly in London.

Council housing was built in three phases – after WW1, mid-1930s and then a big programme in the 50s and 60s.

By the late 20th century the debt on this stock would have been paid down and the properties would have been available at rents which reflected only the cost of ongoing maintenance and refurbishment plus management costs.

By contrast “affordable rents” offered by social landlords are now typically running at 80% of market rents, not really affordable at all and a reason why the UK’s housing allowance benefits bill is so ridiculously high.

We use taxes to subsidise the consumption of housing instead of subsidising its supply – but I digress…

Housing Act triumph

However, Maggie’s uncredited housing triumph was the 1988 Housing Act which introduced the Assured Shorthold Tenancy and the new Section 21 notice.

This meant that a landlord could let, safe in the knowledge that he or she would not be trapped with a tenant for life and an unsaleable property.

Conditions for the tremendous expansion of the PRS would not fully form until mortgage lenders produced specialist buy-to-let mortgages (back in the day, mortgage lenders would increase the interest charged if a home owner wanted permission to let out their home) but the legal framework was now in place.

It’s also the reason why we now naturally think of tenancies as being a renewable six-month fixed term because the shortest term for an Assured Shorthold Tenancy was set at six months in 1988.

Populist politics

Section 21 has come under fire because of a perception (not borne out by the facts) that landlords evict tenants who have the temerity to complain about a lack of repair – so called “revenge evictions”.

In fact most use of the courts for repossession actions is by social landlords removing tenants who fail to pay rent or are exhibiting anti-social behaviour.

The reality is that the limited security of tenure offered by an Assured Shorthold Tenancy is probably not conducive to families feeling settled in a rented home with their children attending a sought-after school because they live in the right catchment and two working parents juggling their journeys to work.

As the demography of the tenant population shifts, and the average length of tenancy extends to 30 months and beyond, it seems to most people to be archaic that a tenant who is meeting all of their contractual obligations could still face the loss of their home at (relatively) short notice.

Solutions for the modern PRS

  • Get over it! If you want security buy your own home.
  • Negotiate a longer term contract with your landlord – he or she will probably welcome the certainty of rental income.
  • Government to legislate to change the minimum term of an Assured Shorthold tenancy to be (say) 36 months but retain the Section 21 notice mechanism.
  • Abolishing Section 21 notices which will mean that a compliant tenant can stay forever unless the landlord has a justifiable reason to take the property back. If Section 21 notices are abolished then the purpose of a fixed term tenancy looks to be redundant and we enter the world of indefinitely renewable monthly tenancies which is the new Scottish approach.

Does it matter? Yes, it does, because if the purpose is to grant tenants greater security of tenure, then unless this a handled by a formula in a fixed term contract it can only be accomplished if there is a statutory mechanism for resolving rent increase disputes.

A landlord trap

Labour politicians are quick to point out that abolition of Section 21 is a half-way house and that rent controls would have to follow.

It seems to me that the twin danger is a civil service which knows that we need a supply of rented accommodation particularly at the more affordable end of the range; plus a Government unwilling to allow social landlords to borrow the money to fund a mass building programme because of the effect on public sector borrowing targets.

Thus, the solution is to trap current PRS landlords into being providers of low-cost housing for decades to come, unable to remove their tenants, unable to increase rents, and only able to sell their stock at a discount to open market values.

Remember the point above about the housing allowance benefit bill rising as rents rise. If rents can be capped then so will the tax burden.

Market reaction – the law of unintended consequences

Bad news for the disabled, single parent families and anyone on benefits – if the personal circumstances of the tenants currently in occupation mean that they are probably going to want to live there long term and need state aid, then these could be a sitting tenant problem in the making.

Bad news for the over-worked court system – if the Government can be believed, the clock is now ticking and landlords may be well advised to use the time remaining to serve Section 21 notices to de-risk their stock.

Bad news for buy-to-let mortgage providers if vacant possession of the asset might not be so easily obtained in future, and might even be discounted to open market value, then lending on buy-to-let properties looks a great deal riskier.

Bad news for anyone thinking about a buy-to-let investment why take the risk until the exact future legal framework is made clear, and there is a cross-party consensus on the future of the PRS?

Good news for insurers providing rent guarantee and legal costs insurance as the likelihood of being stuck with a tenant who is not paying the rent and who cannot be easily evicted goes up, and so will sales of rent guarantee and legal costs insurance, and so will the insurance premiums.

Good or bad news for agents? as installing and removing tenants becomes a process in which procedural legal matters are of vital importance then arguably, even if the PRS shrank overall, those landlords who are left might take up the services of agents to a greater degree than they do now (50% use an agent to let, 14% to let and manage).

What is certain is that a Government minister has (once again) set in motion a destabilising thought process for many actors and agents involved in a finely balanced economic eco-system which will have unknowable consequences in 2019 and 2020 at the least.

Just what we needed!

* Ian Wilson is CEO of The Property Franchise Group

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12 Comments

  1. JamesB

    Well explained .. this will definitely if nothing else deter investment further and make the housing problem worse, I for one would not buy more until things are clear

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  2. kittygirl06

    Yes agree

    Landlords will now start evicting while S21 still in place.

    They have crippled BTL  and many will go to the wall with many associated trades.

    They decided along time ago to make it impossible for BTL with taxes and regs hitting us from every angle.

     

     

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  3. JMK

    Bravo!  An excellent 2 part article.

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  4. Will2

    Conservative confidence trick. A classic con.  Encourage a private rented sector and once the public have invested devalue their assets with controls more in keeping with a communist policy.  Labour attacked pensions and now want to control personal assets. Neither party are electable if you are hard working trying to secure your own future. Politics has lost its way and dangerous times are ahead.

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  5. Deltic2130

    Brilliant article.

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  6. Gromit

    ….and rents are going to escalate further. Business Economics 101 the customer (tenant) always pays.

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  7. Property Money Tree

    Great 2-piece.  Thank you!

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  8. Expertinafield28

    I agree with a lot of this but this stood out to me.

    “Get over it! If you want security buy your own home.”

    We are now in a situation where even a person earning above the average salary can now no longer buy a house. I know that there are many people who would love to own their own property but cannot because saving for the considerable sum for a deposit could take a decade or more. And even following that, the multiplier on the mortgage is still not enough to cover the difference.

    I feel that we sometimes don’t see things from the other perspective because its been so easy for us to get what we wanted. We don’t understand the struggle of the common person.

     

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    1. type60

      I agree completely with this comment.  I can’t quite get over the statement in an article I found otherwise interesting and fair.  Landlords and agents need tenants just as much as these tenants need homes, but there can be a real problem with de-humanising them sometimes. There are plenty of legitimate reasons tenants cannot, possibly ever, buy and moving away to other parts of the country is an unfair or unattractive prospect even if the prices are cheaper. To simply dismiss the fact some people who have to rent currently feel stuck and unfairly treated like that is unhelpful and does nothing for the perception of the industry.

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  9. GeorgeHammond78

    A brilliant 2-piece as noted. I hope Mr Wilson will be using these as part of an intensive lobbying campaign that must be undertaken by him and other CEO’s of major chains?

     

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  10. Woodentop

    Margaret Thatcher is credited with the Right to Buy legislation which allowed long-term council tenants to purchase their homes at a discounted price. ………….and dreadful housing policy……  
     
    Yes as most were built in 1950’s and needed major investment to maintain standards. It was cheaper to sell off, reduce the number of council tenants (they are now home owners with equity and pay for their own refurbishments and not dead money in rent) and re-invest in new homes for the lower demand. That is where the real problem came about, no-one built homes to address the forecast demand, which was compounded by mass immigration spiking and rising since 1997 year on year (Blair government) and over the last decade has been averaging triple immigration (average 500,000 pa) of Thatcher’s years and pitiful new builds.  
     
    Labour politicians are quick to point out that abolition of Section 21 is a half-way house and that rent controls would have to follow.  
     
    For PRS the end is nigh.

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  11. singlelayer

    Currently the ability to serve a Section 21 is based on the compliance with the Deregulation Act. Any slip-ups and Section 21 is ‘out the window’. To an extent…fair enough (but then you move to using a Section 8…slightly more hassle, though not the end of the world). HOWEVER…with the looming removal of Section 21, there have been calls from various quarters (I believe Anthony Gold Solicitors and NearlyLegal blogger Giles Peaker also advocates this), to now link Deregulation Act compliance to Section 8. If this were to happen and you had a tenant with far in excess of the mandatory two month’s arrears, should you make a minor administrative error (let’s say you served the Gas Safety Certificate on the day of the tenancy’s commencement and not BEFORE), you potentially have a tenant that is not paying but you cannot ever get rid of! That is worse than the removal of Section 21.

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