Control speak

Labour’s bold move on private renting seems to be working as politics. Will it work as policy?

I’ve never been to Venezuela or Vietnam but, with due deference to Grant Shapps’s expertise on their housing systems, I do have a few observations to offer.

The Conservative chairman compared Ed Miliband to Hugo Chavez in a ludicrously overblown reaction to the Labour leader’s speech yesterday. Free market think tanks like the Institute of Economic Affairs and right-wing commentators like Fraser Nelson and Harry Phibbs joined him in condemning Labour’s supposed plans to introduce rent controls.

A quick glance at what Labour is actually proposing reveals that it owes far more to Ireland and Germany than Venezuela and Vietnam:

• A ban on the outrageous fees letting agents charge to tenants, which Labour says will save them an average of £350.
• A default three-year tenancy, from which tenants can give one month’s notice after the first six months
• The rent to be freely negotiated at the start of the tenancy with annual increases after that based on a benchmark such as average market rents.

This demonstrably does not amount to the ‘rent controls’ described by Shapps and the right-wing think tanks. Nor will it necessarily lead to a fall in supply: the private rented sector in Ireland grew rapidly after it introduced very similar four-year tenancies with annual rent reviews based on market rent in 2004. And it’s actually more timid than the policies advocated by German chancellor Angela Merkel in last year’s elections. 

As for ‘rent control’ what about the way that the market already operates for the eight million households who currently rent their home in England?

The rents of four million social housing tenants rise by a formula linked to inflation (currently CPI plus 1 per cent). That could definitely be described as rent control but far from restricting new supply it is a vital mechanism underpinning it. Over the last few years social rents have actually risen faster on average than private rents.

In the private sector, there are still a dwindling number of tenants on pre-1989 regulated rents (120,000 in 20087/08, the most recent figure I can find). The Conservative-led coalition has introduced caps on the rents eligible for housing benefit of another 1.6 million private tenants. The bedroom size caps were explicitly designed to reduce the rents charged by private landlords.

So, depending on your point of view, the rents of around 5.7 million tenant households are controlled in some form. ‘Rent control’ has many forms. You could even argue that it applies to the remaining 2.3 million households on assured shorthold tenancies and not on housing benefit. As Duncan Stott pointed out on twitter yesterday, his rent is set and cannot be increased for the duration of his six-month tenancy.

Politically, the row about rents is part of a more fundamental division between the parties about intervention in markets. The Conservatives prefer to subsidise ownership (and boost house prices) through Help to Buy. My guess is that Labour’s new policies will resonate with younger voters who are private tenants. As two indications, see these blogs by Tim Stanley in the Telegraph and Daniel Knowles in The Economist. Neither publication is known for its support for Labour or rejection of free markets, but both are broadly supportive of Labour’s announcement.

It remains to be seen whether this will amount to the big electoral boost for Labour envisaged by its more optimistic supporters – they will have to be registered to vote first – but it does have political appeal. As with capping energy prices, the Conservatives can’t seem to decide where this is Marxism or a gimmick but they may find it is also popular.  

But will it work as a policy? On the economics of interventions in rental markets, see this excellent blog by Alex Marsh. On the history, I’m planning a separate blog soon. Here are a few thoughts about the policy issues in the meantime.

It was noticeable that, unlike previous Labour policy documents on private renters, there were no endorsements from people in the property industry. There was even an embarrassing intervention from the RICS denying that is working on the benchmarks that the Labour press release implied would be the basis of rent setting. Hostile reactions from the landlord organisations and letting agents were only to be expected but like the energy companies before them they will come across as self-interested.

The more serious threat is the one to investment. When it came to office in 1997 one of the reasons Labour was careful to say that it had no plans for major changes on private renting was that it feared spooking the institutional investors supposedly considering a move into the sector.

Exactly the same argument is being made now at a time when Build to Let at last shows some signs of getting off the ground. One of the most thoughtful reactions from the industry has come from Ian Fletcher of the British Property Federation:

‘There are many institutions investing in UK housing, or on the cusp of it, that will be feeling extremely nervous this morning. Those who are investing already are very receptive to offering longer tenancies and many are doing so and the Labour Party’s aspiration on that in itself is not objectionable, but the rent control aspect of this announcement makes no sense. Good landlords will be getting a perverse message that if you are providing a premium product the most you can expect is the ‘average’, whilst bad landlords with sub-standard accommodation can find another justification for charging over the odds.’

That is a genuine concern and it will raise fears that Labour could go further in future. However, any damage to confidence has probably already been done. And the counter-argument – that Labour should do nothing for fear of spooking investors – is exactly what has led to the rise of buy to let and insecurity for tenants.

As Ian Fletcher goes on to say, it also means Labour has to be more forthcoming about how its new policies will work. This is the crucial point: any new system will involve a compromise between protecting tenants and allowing the market to operate and the question is where it is struck. The similar policies proposed by Eric Pickles last year signalled that he knows there is a problem but seem unlikely to achieve much because they are voluntary.

In contrast, Labour plans to legislate for the new tenancies and to ban letting agent fees. However, the detail that has emerged so far includes important flexibilities. The three-year tenancy will begin with a six-month probation and the landlord will be able to terminate the contract for reasons such as rent arrears or anti-social behaviour. After that landlords will be able to terminate with two months’ notice on the same grounds or if they want to sell, refurbish or change the use of the property.

However, some shorter-term tenancies will continue. New tenants like students and people on temporary contracts will be able to request shorter lets with the landlord’s agreement. Landlords contractually obliged to offer short tenancies by the terms of their buy-to-let mortgage will be able to continue to offer them if the mortgage was taken out before the start of the new system.

All of these seem sensible provisions that should go some way to allay the fears of landlords and others in the property industry. However, it’s not hard to see that they could also be the basis of some gaping loopholes in the legislation. What would happen, for example, if banks simply refused to change the terms of their buy-to-let mortgages because they want quick possession? What’s to stop a landlord lying about sale or refurbishment plans or not so subtly implying to a new tenant that they should ‘request’ a shorter let.

The politics of this will be fascinating over the next 12 months. If they help Labour win, the devil will be in the policy details.