Three-year tenancies - should they be compulsory?
An open rental market, where neither landlord nor tenant is in a dominant position, enables rents to rise and fall, which they should be allowed to do.
There are plenty of examples in recent history of how controls risk distorting the rental market.
Following the freezing of rents in 1965, there was a gradual relaxation of rent control over the next two decades. Security of tenure was still granted to tenants, however, and rents were indexed through tribunals and, as a result, the rental market did not function properly.
It afforded landlords no flexibility and provided tenants with both strength in negotiation and artificially low rents. The market was unbalanced and investors avoided it.
Institutional investors caught up in this situation disposed of residential rental buildings where the cost of maintenance had wiped out any rental return and these buildings fell into disrepair, leading to adverse press comment about bad landlords and poor maintenance.
In the early 1970s, the financial crisis and ensuing property slump influenced or forced investors, including insurance companies which found it politically unacceptable to retain residential property holdings, to make further disposals. Whole rental buildings were in some cases selling at 45% of their vacant possession value due to the banks’ reticence to allow flats to be sold piecemeal.
Traders entered the market, buying up blocks with sitting tenants who were paying artificially low, regulated rents. Vacant flats were sold and tenants were offered a discount to persuade them to buy the property that they were renting, typically of about 30%.
These new landlords were incentivised to refurbish buildings by rising property values.
1989 then saw a relaxation of rental controls and the creation of Assured Shorthold Tenancies (ASTs) which are the norm in today’s rental market.
The sales slump in the 1990s encouraged owners to let rather than sell and, hence, the rental market grew. Property bonds were created to buy property to rent, offering investors potential growth. Most of those failed, however, due to the high maintenance cost and low rental returns. Capital values grow quicker than rental values, therefore yields always tend to fall behind in the UK boom/slump cycle.
When mortgage interest relief at source (MIRAS), which encouraged first-time buyers to buy second-hand homes and thus had a stabilising effect on the market, was abolished in 2000, tax relief remained for buy-to-let investors.
This skewed the market in favour of the latter, enabling them to outbid the private buyer. Investors built substantial portfolios by gearing up using buy-to-let mortgages. Banks and building societies did not take into account Capital Gains Tax liabilities on the increased values of portfolios and were thus, in fact, lending against a tax liability. However, facilitating investment in buy-to-let raises prices in the homes market and creates unfair competition for first and second-time buyers.
Should the Government now encourage landlords to give tenants three-year leases? On the positive side, lease reform can provide increased security of tenure to tenants and protection from arbitrary mid-term rent increases.
But in the long term I think that encouraging longer leases is counter-productive for tenants, as this risks distorting the market for landlords once more, and discouraging tenants from aspiring to move into ownership.
In the UK we have always regarded home ownership as a way of increasing savings. The rental market is not a way of saving and risks preventing families from putting aside security for the future.
Do we want to encourage long-term rental? In my opinion, the answer is no. We want to encourage home ownership as a means for people to save money and create local communities, while preserving the rental market for population movement and social housing.
History has shown that when the rental or sales market becomes unbalanced there are complications and political issues. The initiative to re-balance in favour of private ownership for the young must be the logical target. By creating home owner wealth there is an economic good. By creating a larger rental market you are increasing the potential for regulation and the ‘nanny state’.
On that basis we need an urgent reappraisal of the home owners’ market. Whilst it is an old-fashioned idea, the re-introduction of MIRAS provides a quick and long-term solution.
My solution would be to grant MIRAS relief to under 35-year-olds, i.e. the generation which has missed out on what Gordon Brown described as ‘a middle class perk’.
*Simon Agace is a Non-Executive Chairman at Winkworth Franchising Ltd