Disparate expectations - Desperate situations

This blog was written for The Letting Industry Council.

It is part of a series responding to the impact on private renting when the Government meets its commitment to abolish shorthold tenancies by getting rid of ‘no fault’ possession, thereby returning to tenancies with security of tenure.

I recently stumbled on a conversation in the online journal Letting Agents Today. The discussion was about finding a more appropriate name for tenants. ‘Clients’ and ‘customers’ didn’t seem appropriate, but one person suggested ‘End User’. The concern was to find a name that reflected that landlords were providing accommodation, but not HOMES.

This gets to the nub of why so many of today’s landlords think it reasonable to retain s.21.

At the time assured shortholds were introduced in 1989, the justification was that the PRS was the appropriate tenure for those looking for short-term accommodation rather than a permanent home. Students, for example, and those needing to spend short periods in different parts of the country for work reasons.

This was only ever a partial view of the PRS, but it did represent a higher percentage of the sector than it does today. There were always waiting lists for Council housing, but private renters on the list could hope to be offered a Council home within a few years, while others could still aspire to owning their home once they had saved enough for a deposit.

Most of the tenants assisted by Advice for Renters had non-professional landlords who by default, created assured (non-shorthold) tenancies due to their failure to serve the requisite s.20 notice giving the potential tenant prior warning that their tenancy would not provide security of tenure. This meant that we could assist those tenants to exercise their rights on matters such as disrepair, without the risk that they would be evicted as a result.

When the Government realised that the Housing Act 1988 made it too hard for non-professionals to create shorthold tenancies (a professional approach being deemed unnecessary), the prior notice requirement was turned on its head by the Housing Act 1996, making shortholds the default tenancy.

This period also saw a massive Government clampdown on the ability of local authorities to build new Council homes, along with the Right to Buy at huge discounts which depleted existing Council stocks by more than a third, many of which were later sold on to private landlords, as part of the massive expansion of the Buy-to-Let investment market.

The financial advantage of BTL investments over mortgages for would-be first-time buyers/owner-occupiers, pushed up house prices beyond the reach of most of the latter. This, in turn, increased the demand for PRS homes from those who could no longer afford to buy, which combined with those no longer able to access social rented homes (as the only, not the preferred option).

These changes led to the position we are in today, that is, the vast majority of private renters need a secure home, while the vast majority of private landlords do not see themselves as providers of secure homes. Like any other investor, BTL landlords want the flexibility to move their investments as the market dictates, to maximise their yield.

The Government’s commitment to abolish s.21, thereby restoring the security which is an essential feature of a real home, has exposed this very basic mismatch.

It is therefore not surprising that the Beyond Section 21 report, and the NLA report on which it relies, predicts that the abolition of s.21 will act as a disincentive for investment, with a significant proportion of landlords indicating they would either exit the market completely, or reduce the size of their portfolio.

In practice, this decision is more likely to rest on the question: 'Will my investment result in a higher yield in any other area than property?' We live in very uncertain times but bearing in mind the anticipated Covid/Brexit driven recession over the next few years, and continued low interest rates, it is unlikely that such alternatives will exist. The PRS as an investment is unusual in that it can normally be relied on to provide a steady, and usually increasing income as well as an appreciating asset.

This is unfortunate, as a significant reduction in the PRS is more likely to resolve the ‘mismatch’ than the measures proposed in the Beyond s.21 report.

The disproportionate size of today’s PRS is unhealthy and has contributed to our 'broken' housing market. Buy to Let mortgages encouraged a rapid expansion of the sector and continues to do so. In the 12 months to June 2019 a further 234,000 buy-to-let mortgage loans were taken out at a total value of over £36 billion1. As noted above, BTL is seen primarily as an investment and as such, it is incompatible with the provision of the secure homes that people need. If landlords did pull out of the market in sufficient numbers to impact on house prices, then more current renters would be able to buy and local authorities would be able to acquire properties for renting at genuinely affordable rents, as some have plans to do, even at current market rates. This would result in huge savings to the public purse both directly in term of lower welfare benefits and reduced need for temporary accommodation for homeless families, as well as indirectly in areas such as health, education and social services.

Public sector borrowing for the acquisition of properties to be rented as secure homes does not require the flexibility required by private investment, and any profits from the rental income can be reinvested in more social rented homes with security of tenure.

JACKY PEACOCK

Chief Executive

Advice for Renters

1: https://www.finder.com/uk/buy-to-let-statistics