White Paper or White Wash?

Viewpoint

The government’s action plan for property looks as though it was watered down so much that even former Tory housing minister Grant Shapps has admitted it will make barely any difference at all.

With the government under pressure on many fronts this month, its failure to grasp the housing agenda, which the Housing White Paper clearly shows, particularly with respect to renting, is on display again this week as the government is bounced into promising help for high street firms hit by its controversial revaluation of business rates, in the face of a major Tory rebellion.

The Housing White Paper published early February sets out the direction of the government’s policy on the housing market. Whether you see the UK housing market as “broken” or not, or the proposed new direction the correct one, the paper does not mince its words on the matter: “The housing market in this country is broken, and the cause is very simple: for too long, we haven’t built enough homes.”

Nothing new here as it’s been common knowledge that government after government, of whichever colour you choose, has missed its set housing targets by miles. This study however, sees the problem as threefold:

• Not enough local authorities planning for the homes they need;

• House building that is simply too slow;

• And a construction industry that is too reliant on a small number of big players.

The laws of supply and demand dictate that in any market, where supply is short, prices rise, it’s just a fact of life in a free market economy. This, coupled with asset price inflation resulting from pumping credit into the system (quantitative easing and ultra-low interest rates) means that the result is quite predictable: since 1998, the ratio of average house prices to average earnings has more than doubled – from under 4:1 to almost 8:1.

The shortage of supply in housing is compounded by demographic changes that have increased demand:

• Migration / immigration, where net migration has reached unprecedented levels in recent years.

• More single living, coupled to divorce and longer living

• Worker migration from the poorer regions of the country to regions where job creation has brought more opportunities, but consequently expensive living.

• An economy that has grown faster than any other in Europe, resulting in record employment, especially in the south-east.

These changes, which have accelerated over the last 20 years, and have resulted in a situation where owning a home has become a distant dream for millions of people, and that dream, it would seem, is getting further out of reach for many. “Generation Rent” has become a familiar term in the UK media, though we should bear in mind that Britain is not alone, the problem is far from unique to us, though in Britain it is perhaps more acute on a relatively small land space: nearly every western country, from North America to New South Wales, has an almost identical housing problem.

However, public opinion started to move against the private landlord in the UK when some of the more extreme and unsavoury antics came to light: media stories of instant riches and paper “millionaire” buy-to-let landlords, many of whom were not really landlords but speculators and chancers, and another cohort of “slumlords”, housing illegals and no-income tenants in squalor. This all produced a plethora of media stories which turned the public right off.

According to the White Paper, 28% of homes are now non-decent, though the situation has improved compared to the 37% figure from 2010. It claims that “an increasing number of private tenants (65%) are happy with their tenure, compared to 48% in 2004”, but what it does not say is that private tenants have almost always returned higher levels of satisfaction that council (social) tenants in cross sector surveys undertaken.

There is no doubt that, as the paper says: “in areas where the housing shortage is most acute, high demand and low supply is creating opportunities for exploitation and abuse: unreasonable letting agents’ fees, unfair terms in leases, landlords letting out dangerous, overcrowded properties.”

The Council of Mortgage Lenders has predicted that by 2020 only a quarter of 30-year-olds will own their own home, whereas, again according to the White Paper, in contrast, more than half the generation currently approaching retirement were homeowners by their 30th birthday.

With most young people needing help from the “Bank of Mum and Dad”, it’s perhaps not surprising, that a large section of the community resented the possibility that buy-to-let landlords were pushing up prices for first-time-buyers.

The government, as governments do, took up the popular mantle, introducing several measures to tackle the rogues in the industry, exactly what was needed, but more worryingly, to “cool down” the buy-to-let market.

Prompted by all of the above, and a large overhang of buy-to-let lending debt, the Bank of England warning the then Chancellor, George Osborne, of the growing risk, he acted by restricting mortgage availability and increased taxes on rental property income, severely hitting profitability for some.

The White Paper indicates a radical shift away from the traditional Conservative policy of home ownership, to one of recognising that renting is going to be a major sector in the future, needed to house those unlikely to be able to afford to buy. But they see this housing to be supplied more and more, not by small-scale landlords but by institutional investment and large block management.

Under the last Chancellor the PRS became a scapegoat; it has suffered since because of this and all the indications are that his actions will discourage small-scale landlords from investing in buy-to-let, a trend that many feel will create an even bigger crisis in the housing market.

The Royal Institution of Chartered Surveyors (RICS) says it had warned the Housing Minister at the time that “unless urgent action was taken there would be a 1.8 million shortfall of rental homes by 2025.”

With increasingly unaffordable house prices, says RICS, the majority of British households will be relying on the rental sector in the future. “The number of UK households renting property doubled from 2.3 million in 2001 to 5.4 million in 2014. Yet the previous Prime Minister took measures to dampen the demand for buy-to-let investments by introducing taxation policies that unfairly penalised landlords. This further reduced supply, arguably makes a 2025 rental supply crisis more likely.”

The focus on encouraging more and more build-to-rent would, on the face of it seems a good strategy to quickly solve the problem of shortages, particularly in the bigger cities. But building new housing alone is unlikely to solve the crisis. Not everyone will be able to afford the rents in a new apartment, so existing properties run by small-scale private landlords will still vastly outnumber the new provision, even if the institutionalisation project takes off as the government hopes.

A radical proposal in the White Paper is the “family-friendly” three-year tenancy for those tenants who want them. These it would seem are aimed specifically at the Build-to-Rent institutional investment market, though I would question whether these investors would all be looking to rent to families, over the more profitable and less troublesome single and couple professionals’ market.

The Paper says: “While we focus our long-term strategy on increasing overall supply, there is clearly also a need to intervene to help households now who are struggling as a result of the immediate symptoms of our broken market which are causing anxiety, hardship and unfairness for many households and communities.”

There will be help, the Paper says, for the over 4 million households who now rent their home from a private landlord, the around 4 million people with leasehold homes in England, and upfront costs including fees charged by letting agents to tenants. It is very likely that letting fees charged to tenants will be banned in the near future.

Protection is on the cards for a growing number of those who buy leaseholds. New houses sold on a leasehold basis are marketed at a reduced price, which looks attractive compared to freehold, but naïve purchasers are often not aware at the point of sale of the associated costs of buying a new leasehold house. Though solicitors should point this out to them, this is not always the case, and it results in the leaseholder facing higher long-term payments and a greater loss of value than anticipated.  The Law Commission has been asked to identify opportunities to incorporate additional leasehold reforms as part of their 13th Programme of Law Reform.

The government is to continue its efforts to bring up safety standards in the private rented sector, and to drive out the rogue landlords. The measures introduced in the Housing and Planning Act 2016 will bring in banning orders to remove the worst landlords or agents from operating, and enable local councils to issue, in effect, on-the-spot fines, as well as prosecute.

The new energy efficiency regulations setting out minimum energy efficiency standards (MEES) for England and Wales will apply to buy-to-lets from April next year (2018), meaning a property cannot be let with an EPC rating below E.  There are plans to extend mandatory licensing of Houses in Multiple Occupation from the current 5 unrelated occupiers over 3 stories, to all HMOs, and there are also ongoing consultations regarding the introduction of mandatory electrical safety checks for rented properties and client money protection for letting agents.

All very laudable aims, many of which have been said before, but nevertheless, creditworthy and most industry experts in the private rented sector would support them. However, a lot determination will be needed to apply these principles in practice, some of which have been tried before, if any impact is to be made to tackle the housing deficit that has built-up over decades.

It still leaves a void as far as the average private (buy-to-let) landlord is concerned. It is unlikely that institutional investment, which today represents less than around 3 percent of the private rental market, will provide the whole solution, so where is the encouragement and support for the small-scale landlord, why is the focus of the Paper purely on the negatives for them?

What I find most surprising about the White Paper is that, apart from the negative comments, there is no mention of the massive contribution small-scale private landlords make to the UK housing sector.

When challenged, housing ministers always emphasis how valued the private landlords’ contribution is, but when it comes to policy statements and action, they seem to do the exact opposite – it just seems so hypocritical. Right now the whole government emphasis appears to be away from helping the small-scale buy-to-let landlord and towards encouraging the institutional investor. The Paper also indicates that local authorities are to be encouraged to become private landlords, to invest in private rented housing to let at commercial rates, in direct competition with the private rented sector (PRS).

A London School of Economics report (https://goo.gl/NI4IV8) has warned that: “even if institutional investors enthusiastically enter the market, individual landlords will remain dominant – as they are across Europe.” So far there is little evidence that the government’s drive for institutional build-to-rent has been a roaring success, as a recent House of Lords committee report (https://goo.gl/0qp3PP) says, previous attempts to encourage such efforts have “achieved little”.

Instead the Residential Landlords Association (RLA) has called on the government to ensure that incentives are provided to all of the private rental sector, including encouraging smaller private landlords and supporting them to expand their investment to provide the extra housing urgently required.

Ministers have been saying for some time that they want to encourage longer tenancies in the rental market, presumably to encourage more family tenancies, yet official government data shows that the average length of time a tenant spends in the private rented sector (PRS) in the same home is now four years.

Responsible landlords will always encourage longer tenancies, regardless of the wording of the agreement, providing (1) rent is paid on time and (2) the property is being treated with respect. The only motivation I see for the desire for a longer term commitment is to get landlords to be tied in regardless of the performance of the tenancy. I find it hard to believe that small landlords or institutional landlords would see that as desirable.

RLA Chairman, Alan Ward commenting on the White Paper, said:

“Whilst we welcome efforts to boost the supply of homes to rent, this will not be achieved through a single minded focus on corporate investment.

“The very fact that a renewed push is being made for such investment is a sign that previous efforts have failed.

“Any plan for the rental sector that does not provide equal support and encouragement for the vast majority of individuals making up the country’s landlord population is doomed to failure.

“Instead the Government should look again at the tax rises imposed by the previous Chancellor on landlords which will only act as a disincentive for the hundreds of thousands of smaller landlords to get more properties on the rental market.”

Small-scale private landlords face tough challenges ahead, especially relating to the tax changes, and also the other coming legislation mentioned above. Because of this rents are likely to rise and landlords leaving the sector will increase rented housing shortages. Surprisingly, the White Paper has little to say in their support and almost denies the reality when it “aims to deliver more affordable homes to rent.”

Tom Entwistle, Editor of LandlordZONE®

Housing White Paper 2017: https://goo.gl/5lirqd

… LandlordZONE.

View Full Article: White Paper or White Wash?