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July 8, 2015 was a watershed moment for the UK property market — the significance of which is only now being fully appreciated. In his first summer budget, then Chancellor of the Exchequer George Osborne drew near universal acclaim when he announced a phased reduction in mortgage-interest relief for landlords. Few saw any reason why landlords should continue to benefit from relief that had been withdrawn from owner-occupiers more than 30 years earlier.
And so began a protracted squeeze of the country’s private rental sector, which has culminated in this summer’s rental property drought.
Despite the ongoing policy missteps that have brought us to this point, there are still practical measures that the government can take to ease the strain. But time is short.
In a very literal sense, tenants are paying the price for a succession of policy mistakes. London rents are already 19% higher than pre-pandemic levels, and many would-be tenants across the country are struggling to find a home at any price.
This is largely because many landlords have responded to longtime tax and regulatory nudges by selling up. A survey by industry group Propertymark suggested that the number of properties available to rent declined by 49% between March 2019 and March 2022. It also indicated that 53% of buy-to-let properties sold this March left the private rental sector altogether.
Economists from the Bank of England to the University of York have insisted that such selling should make no difference to rents, because more homeowners would mean fewer tenants. Unfortunately, that math doesn’t quite work out. Rental properties typically house more people than those that are owner-occupied. And while all buyers can rent, not all renters can afford to buy.
Yet further measures to deter landlords quickly followed the 2015 budget. In 2016, a 3% tax surcharge was applied to all residential landlord property purchases. Residential landlords are now also subject to greater rates of capital gains tax (CGT), whereas owner-occupied homes attract no CGT regardless of value. Even cryptocurrency gains are taxed at just 10% for lower-rate income taxpayers and 20% for higher-rate payers. Landlords’ gains, however, are taxed at 18% and 28% respectively.
In June this year, the government published a well-intentioned white paper entitled “a fairer private rented sector,” which among other things, sought to make it more difficult and expensive for landlords to evict tenants. That has proved the final straw for many landlords.
But as is now clear, tenants have been hit far harder than anyone else by these measures.
The fundamental problem, of course, is that both national and local governments have failed to deliver on their supply-side pledges. Interventions such as the various Help to Buy schemes and the aforementioned tax measures against landlords have either increased demand for home ownership or decreased the supply of properties available for rent. Both have conspired to push rents higher.
Reversing these tax increases is unrealistic, however, given that taxing landlords is one of the few issues that unites an otherwise polarized electorate. At the same time, even if there was the will to tackle the shortage of social housing, this would take many years to bear fruit.
A more pragmatic approach would be to consider the issue from a landlord’s perspective. (Here I must declare an interest, as I let properties in London and Sheffield.) As we age, many of us find ourselves with less appetite for financial complexity. With smaller returns and increasingly convoluted administration, landlords are reaching the point of selling sooner than they might otherwise have. And when they sell, with fewer younger landlords to replace them, only a minority of those properties remain available to rent.
One way of preventing this loss of supply would be for local or even national government to assume management of these properties under long-term leases.
The government would pay landlords a rent set with reference to market rates, but reduced somewhat to reflect the fact that local authorities assume most of the responsibility for tenanting and maintaining the property. The tenants would then pay whatever social rent the government chose. This would allow government to quickly control a significant number of properties, without the capital expense of either purchasing or building them. It would also facilitate supply management. Meanwhile, landlords would receive a steady rent and a viable alternative to simply selling, which would ensure a continuity of supply to the social-housing sector in a cost-effective manner.
Optically, this would counter the unhelpful “rogue landlord” narrative and give tenants greater security of tenure, while increasing competition in the rental market as a whole.
This is no pipe dream. Local governments have, on occasion, employed precisely this vehicle, albeit on an ad hoc and low-key basis. The real problem, beyond awareness and appetite, is that national government pressure has caused housing benefits to lag further and further behind market rents. This has rendered such leases financially unviable for many landlords.
Another idea is to modify tax incentives around gifting. There are significant inheritance-tax incentives to leave gifts to charity in your will. A slight modification to these, and the creation of a national social housing charity, might provide aging landlords participating in such long-term leases with a tax-efficient means of gifting properties to the social sector in perpetuity.
What is clear is that many of the assumptions regarding landlord behavior are flawed or just plain wrong. If pushed far enough, landlords leave the sector and this does have an impact on the real world.
As for tenants, many are coming to the uncomfortable realization that the only thing worse than having to rent from private landlords is having no private landlords left to rent from.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stuart Trow is co-host of “Money, Money, Money” on Switch Radio and author of “The Bluffer’s Guide to Economics.” Previously, he was a strategist at the European Bank for Reconstruction and Development.
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