Property Investors, should we worry about rent control

  

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“Next to bombing, rent control is the most effective technique known so far for destroying the housing stock of cities”…Assar Lindbeck, Chairman of the
Nobel Prize committee for Economics

The recent local government election result suggests that Labour is on the road to recovery and it’s conceivable to imagine Ed Miliband leading a majority Labour government in the next parliament. Some left –wing thinkers and journalists have started to float the idea of re-introducing rent control as a popularist measure; why?

Rents are rising and biting particularly hard on young professionals in London where rents are rising in real terms i.e. even after allowing for inflation. The perception is that greedy landlords and their price-gouging agents are taking advantage of a shortage of rented accommodation and a lack of alternative tenure options since the mortgage market continues to demand first time buyers have around 15% of the purchase price in savings. Ken Livingstone narrowly missed being elected Mayor of London and one of his pledges was to set up a council run letting agent so as to under-cut the existing agents and take the heat out of rent rises.

Housing Benefit spending has risen from £11bn in 2000-01 to £21bn in 2010/11, if there is no change in policy it will reach £25bn in 2014. The Coalition response has been to cap benefit for recipients. This is seen as rough justice and a belief that we will see thousands of benefit recipient families displaced from high rent areas. If landlords were limited in the rent that they could charge then there would be a saving to the Exchequer and settled communities would not be uprooted.

Landlords are a new class of asset owner and have done rather well for themselves. The “average” landlord has multiple properties – somewhere around six properties each is plausible. This does not make landlords rich, the majority still have mortgage debts to service from rental income but this misses the point – when would-be first time buyers cannot afford a home of their own, individuals who own multiple properties are seen as anachronistic.  I once made the mistake of explaining my pension plan to a journalist – I said that if you own just ten properties, debt free by the time you retire you would enjoy an income of around £5,000 per month and draw down capital for holidays, cars, health care as you wished. I got a very frosty reception and in a second I realised that my journalist contact was fretting about where to get the cash for her first property, not the next nine.

The renaissance of the private rented sector has its roots in the Thatcher government’s decision to reverse decades of rent control and to allow new lettings at “market” rents on Assured Shorthold Tenancies, which guaranteed the landlord the right to recover possession. To this day there are elderly sitting tenants enjoying “Fair Rents” under the Rent Act 1977 which contained a formula that a rent should be set with regard to the size, age, character, locality and state of repair of a property but dis-regarding the shortage of rented accommodation. Rent Officers had to inhabit a parallel universe in which they imagined that if demand for rented accommodation was met with just enough supply, what would the rent be? The answer was about half the market rent, or at least that was my recollection of the time I worked as a Rent Officer in Tyne & Wear in the late 80’s who had to deal with disgruntled landlords who felt they were carrying the burden for the failure of government housing policy.

The reason is rent control usually goes hand-in-hand with tenancy rights and security of tenure. This is because if a tenant has security but the landlord can put the rent up, then he can price you out of the accommodation. Similarly, if your rent is controlled but the landlord can give you notice to leave, then provided he has a more profitable use for the accommodation his economically rational strategy will be to clear out his tenants.  

In the 1970’s and 1980’s the tenure sector that was growing was owner-occupation. If an elderly sitting tenant died then the landlord would sell to an owner-occupier. They would not contemplate letting to another tenant, because to do so would mean a controlled rent and another lifetime of not being able to recover possession (in broad terms anyway). This became translated into a rather cynical game at the auction houses whereby a property for sale with very elderly single sitting tenant was worth considerably more than a similar property but with a middle aged couple in occupation. It was known as the “expectation value”. During the 70’s and 80’s the private rented sector continued to decline until it reached its nadir of 9% of the total housing stock from 90% at the turn of the 20^th century.

So rent control was bad for new investment in the private rented sector, it made landlords reluctant to invest in their properties and it distorted the labour market because someone with a controlled rent and a tenancy for life was very unlikely to give these things up and move elsewhere. 

Who was rent control good for? Affluent middle aged people who are settled in a locality do well out of rent control, in their case it’s a subsidy which passes directly from the pocket of the landlord to the pocket of the tenant. Rent control is also good for a Government that wants to cap its Housing Benefit bill.

So what to do if you are a private investor? Well, a Labour government committed to re-introducing rent control is still a long way off but if you wanted to de-risk then here are some strategies to consider;

• Invest in properties that are easy to sell and have potential for future capital growth – you could sell if you needed to
• Let to tenants who might buy the property from you – you might have a ready exit
• Buy properties at higher rental values – these are the least likely to be rent capped or be subject to extended tenant rights to security of tenure
• Avoid investing in properties that appeal to Housing Benefit recipients
• Consider fully furnishing your lettings – properties which are seen as being suitable for short term letting are the least likely to be rent capped.