Miliband’s pre-election football could turn off rental investors

Labour “killed off the private rented sector” was a common refrain when I was a housing reporter in the mid-Eighties. Legislation, including the 1974 Rent Act, let council rent officers determine “fair rents” amid other controls that did, indeed, appear to put off all but the hardiest investors. The number of privately rented homes fell from 3.8 million in
1971 to 2.4 million in 1980 (sliding to 1.9 million in the early years of the Thatcher government).

But opponents of regulation argue that the progressive removal of most of those controls throughout the 1980s spurred a revival in privately rented properties to just over five million now.

Miliband, speaking on MayDay (an ominous sign for some critics), said a Labour government would end “excessive” rent rises, tighten controls on landlords and prevent estate agents from levying letting fees.

Even The Guardian, however, described the proposed ceiling on rents as “a bit vague”: Labour says this would be based on a benchmark such as average market rents (a circular mathematical argument) and may or may not also be linked to inflation.

Party press officers said the RICS “is already examining what an appropriate benchmark might be”. But RICS responded by saying it “is not developing proposals on rent benchmarks for the private rented sector, and we do not recommend that a government introduce a ceiling on rent increases”.

The planned curbs on landlords look more developed: a national register of landlords would be set up; estate agents would be banned from charging tenants letting fees, which Labour claims average £350 (they would still levy them on landlords); and three-year tenancies would be the norm.

As now, a tenant would be able to terminate a tenancy after the first six months, with one month’s notice. But a landlord could, Labour intends, only do so with two months’ notice and if certain conditions were met, such as the tenant failing to pay the rent, indulging in anti-social behaviour or otherwise breaching their contract.

After the six-month probationary period, contracts would automatically run for a further 29 months. During this time landlords could only ask occupants
to leave for a breach of contract, if they wanted to sell the property or needed it for their own use, rather than as a ploy to hike the rent.

The National Landlords Association described the plans as “flawed”, arguing that most landlords would love good tenants to stay as long as possible. The implication was that it is only the occasional “bad ‘un” they (and possibly the neighbours) would like to get out. As a very small-scale landlord myself, I would concur: a well-behaved tenant with a dependable direct debit is worth years of minimal rent increases.

Miliband’s speech also repeated the established pledge to make sure 200,000 homes a year were built “for the first time for a generation” by the end of its term of office.
The problem is, his rhetoric on the rental market may make this harder to achieve. Housing starts in England during Q1 were up 38% on a year earlier, with private units rising by 44%.

The extent of the increase in the latter was probably helped by more benign weather than during the cold snap of 2013 and was undoubtedly fuelled by the stimulus of Help to Buy (which kicked in during the following quarter). But I’d wager that buy-to-let investors, both foreign and home-grown, provided an additional lift.

The latest Council of Mortgage Lenders statistics show the number of buy-to-let loans for house purchase in March rose by 46% year-on-year, while the value leapt 60%. This compares with a more modest 17% increase in the number of house purchase loans by owner-occupiers.

What is difficult to untangle is how much of that increase in buy-to-let mortgages went into new-build rather than second-hand homes. It is likely that buy-to-let is a big driver of growth in the South Eastern market, in which Help to Buy has failed to make much of an inroad.

Much of the steam could come out of this sector of the market, at least temporarily, if there is a prospect of greater red (pardon the pun) tape and some degree of rent control.

Investors could well sit on their hands until the outcome of next year’s poll.

Lenders, already facing greater legislation of their mainline mortgage business through the Mortgage Market Review (with the possibility of even further tightening by the Financial Policy Committee next month), might also rein in their appetites.

Less certain is whether the prospect of controls might affect housebuilders’ deliberations on land buying. It probably won’t affect the national players but may influence those focused on the London market, where investors frequently make up more than half of sales.

It may be far-fetched to say we will end up even halfway back to the 1970s but the latest intervention makes housing even more of a pre-election football. That is rarely a great backdrop for investment.

Alastair Stewart is building and property analyst at Progressive Equity Research