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Kevin Hollinrake is MP for Thirsk and Malton. Dr Rosalind Beck is a doctor of Criminology and a Conservative Party member in South Wales.

Most people assume when you have a shortage of a product, the answer is to create more of it. Currently, in the context of the UK housing shortage, however, this is not seen as the answer; instead, the thrust of policy is to play musical chairs with what already exists.

This is seen, for example, in policies to force the transfer of houses from one tenure (private and social rented housing) to another (owner-occupation), via punitive taxation and regulatory measures in the private rented sector (PRS) and by Right to Buy in the social sector. This does nothing to alleviate the original problem – a shortage of housing.

What’s worse, as pointed out in a recent report by Jacob Rees-Mogg and Radomir Tylecote, some of the ‘solutions’ in turn create new problems, for which further solutions must be found.

Theresa May’s sudden decision to scrap Section 21 notices in the private rented sector (PRS) is a case in point. If this knee-jerk decision goes ahead it will mean tenants gain indefinite tenancies; this is because landlords won’t be able to serve a notice on them unless they breach specified conditions of their contracts, which would have to be proved in a court of law. Scrapping Section 21 would be disastrous for the PRS and we are hoping that this will not be pursued by the new administration.

Of course, no sooner did Theresa May make this announcement, than George Monbiot, amongst others on the left, predictably called for the next ‘solution’ to the problems this will create:

“The government’s promise to repeal section 21 of the 1988 Housing Act, which enables owners of property to evict tenants without good reason, will achieve little if it does not come with a cap on rent rises: otherwise landlords can engineer de facto evictions by hiking the price.”

And so the clamour for rent controls began, notably with Sadiq Khan demanding powers to introduce them in London. He has made this his flagship policy, despite having no idea how it would work and what the impact would be.  Sadiq Khan’s team don’t know if leftie rent controls will help Londoner.

Although it is in the Labour Manifesto to introduce them nationwide, the more immediate threat is in London, so we will focus on that here.

The special case of London.

In recent years, it has often been stated that rents are soaring everywhere in the UK. This is false as rents have generally tracked inflation and in London rent rises are already well below inflation, increasing by just 0.9 per cent in the year to June compared to CPI standing at two per cent.

This is therefore a curious time to demand rent controls, as it could mean increases being capped at, for example, 2.5 per cent.  This could result in 2.5 per cent becoming a target and rents rising more than they would have otherwise done.

To support the policy of rent controls, emotive arguments are often deployed, especially about the experience of renters in London. One hears how expensive rents prevent them from saving so they can later buy a home of their own.

This is of course regrettable, but there are two sides to every coin and two sets of circumstances to look at; those of the recipient of the housing and those of the provider of it. Without the willingness of the latter, there would be no rented housing. However, in a currently febrile atmosphere, with hardly anyone willing to speak up for private landlords, their perspective is, rather stupidly, rarely considered.  Taking no account of landlords in this, is not only bad for them; it is extremely damaging also to the interests of tenants.

An analysis of the situation demonstrates that rent controls would in fact devastate the PRS in London, where the proportion of private rentals is higher than anywhere else in the country, at around 40 per cent of all housing.

To illustrate this, one only has to compare, for example, Bermondsey, in London, with Mountain Ash in the South Wales valleys.

In South Wales many two-bed houses can be bought for under £65,000 and be rented out for under £100 per week. This rent amounts to a gross yield of 7.4 per cent.

In contrast, a similar two-bed home costing £500,000 in Bermondsey would typically be able to command a rent of £1,550 pm. The gross yield here would be 3.7 per cent.

As one landlord explained to us:

“Some London tenants might think their rent should be capped or reduced to some arbitrary figure set by Government, so that they can manage without worrying. But on a £500,000 house, the landlord is likely to have put down a deposit of £100,000  from their own savings. They will only do that if they can get some return on their money. Does the Government and the tenant think that a previously unknown-to-them private individual – that is, a landlord –  is going to reduce their charges so that they make nothing or even a loss?  What landlord would agree to do this? How would this subsidising be sustainable over the long-term?”

Because £1,550 pm rent seems a lot to most people, Khan and others misrepresent this as though London landlords are committing some heinous crime in seeking a modest gross return of not much more than 3%.When other costs, including mortgage payments and maintenance, are taken into account the figure is more likely to be around one per cent, if that.

Somebody needs to explain business, yields, returns and commercial decisions to Khan, as he clearly does not understand the small margins involved in the PRS.

In a situation where yields are already so tenuous, if caps are put on what landlords can charge, many will make nothing on their investment. The new tax levy, known as Section 24, has already pushed many landlords into a loss. Caps would push this further and many landlords would be forced to sell up.

There are further complications. Rent controls would also be likely, for example, to mean that a time comes when rents no longer meet lenders’ requirements – which have become more stringent because of Government legislation – and the landlord may not be able to re-mortgage when their mortgage term come to an end.  In such circumstances, landlords will have to sell up, evicting the tenants in the process.

As Richard Lambert of the National Landlords Association has said:

“Sadiq Khan… needs to tell us why rent control won’t reduce the number of private rental homes available to Londoners, as it did before, and as it has done everywhere else it has been introduced.”

Some people might welcome this, thinking that first time buyers can buy the sold houses. They need a reality check; such homes are way out of most first-time buyers’ league and have been for decades. Indeed, it is only because landlords have been willing to let out such homes for a small gain (capital appreciation may also occur, but is not guaranteed), that any tenants can afford to live in these areas. This has been critical in supporting the London economy, but the contribution of private landlords has not only not been recognised; it has been derided as though they have done something wrong.

In addition, were caps to be introduced, not only would current landlords bale out, but this would lead to a complete halt on further investment. One need only look to Barcelona, where the Mayor, Ada Colau recently legislated to force developers to include a 30 per cent social homes quota in all new developments of a certain size. Colau boasted that this would lead to 300 new affordable homes in the city each year. Instead, as the quotas make new development unviable, building has collapsed in the city; developers have simply taken their investment elsewhere.

Similarly, who is going to choose to build homes to rent in London, when rent caps are in place, meaning scant, if any return on their shareholders’ investments? Why would they not just go elsewhere?

It is thus rather galling that this issue comes up time and time again with no-one learning from the international and historical experience of rent controls.

The lessons are:

  • Rent caps kill investment.
  • Rent caps lead to a contraction in supply
  • Rent caps lead to a lowering of quality in private rented housing.
  • Rent caps are not a solution to a problem.
  • Rent caps create new problems.

 

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