Generation Rent’s dream based on fallacious theorem from Trustee

The assured shorthold tenancy (AST) that was introduced three decades ago allows people to let properties for a fixed-period. Section 21 of the Housing Act 1988 allows the landlord to give two months’ notice to end the tenancy after the fixed period without stating a reason.

Section 21 notices were labeled “no fault” evictions, because the landlord did not need to prove a breach of the tenancy agreement in court. However, it is often used where breaches have occurred, because it is quicker and cheaper than the section 8 process. Disrupters propagate the myth that if S 21 is used it means that the tenant cannot have been at fault.

Abolishing S 21 would take us backwards to tenancies for life – the tenant’s life, which might end after the landlord’s. That is what caused the PRS to atrophy in the last century, until the Housing Act 1988 and Section 21 started to revive it. However, Generation Rent (GR) is too young to know about any of that.

GR claims that rents will not be affected if abolition of S 21 drives landlords out of the market.  This is the fallacy.

Last week its Director, Dan Wilson Craw, published a blog called “Life after Section 21” Click here

I quote from it below – the precis in the headings are mine. See if there is anything you disagree with.

Landlords evict without needing a reason

“Today is the 30^th anniversary of the Housing Act 1988 receiving Royal Assent and becoming law. The Act introduced the assured shorthold tenancy, and, with it, Section 21, the ability for landlords to evict without needing a reason.”

GR has seen the future and it is tenancies for life

“we are calling for Section 21 to be scrapped, and demanded this in our response to the government’s recent consultation on longer tenancies. In our response, Click here, we also set out how the private rental market should work once Section 21 is history.”

GR knows how many tenants have done wrong and how many haven’t

“There are too many no-fault evictions – i.e. people forced to move without having done anything wrong”

Prospective vendors should give 6 months notice and refund three months rent

“Our proposal is:

1. Abolish Section 21 – this would create open-ended tenancies.
2. Landlords could still evict, using Section 8 of the 1988 Act, so must prove grounds in order to do so. The grounds should be enforceable, so if they evict to sell, but subsequently re-let the property, for example, then they would face a penalty.
3. A relocation payment for tenants evicted on no-fault grounds, equivalent to three months’ rent.
4. A longer notice period to allow tenants to find a new home.[6 months per consultation]
5. Limits on rent increases to wage inflation.”

Anyone who lets a home while moving temporarily for work should pay to get it back

“This package of measures would reduce the number of no-fault evictions by preventing retaliatory evictions, and, with the added burden of a relocation payment, would encourage more landlords to sell with sitting tenants, or to move into a different property. The relocation payment and extra notice would mitigate the upheaval for the tenant. And rent regulation and the need for grounds for eviction would encourage tenants to make requests of their landlord without fear of a rent hike or eviction in retaliation.”

The ideal

“Ideally no landlord would evict to sell or move back in”

The plan

“By ending Section 21, landlords would be unable to enforce a fixed term, so tenancies would become open-ended by default.”

Rent increases, everywhere, limited to the national average of earnings, every 18 months

“We selected wage inflation as the ceiling for rent increases because it is more closely linked to affordability.”  “It should be said that this is not rent control. ”

Driving landlords out will help tenants

“This package of measures would improve the situation of the tenant enormously”

National registration of landlords is needed to stop them pretending they want to sell

“In our proposed system they should sell up with sitting tenants to professional landlords. But some might continue to let using other forms of occupation to evade detection. That’s why any reform must be underpinned by a national register of landlords. A tenant considering whether to apply for a tenancy should be able to check the property against a central database and find out if the owner is legally allowed to rent it out. The government is already proposing that all landlords be required to join a redress scheme – this is just one step further.”

All landlords must buy rent guarantee insurance to prevent discrimination against benefit claimants

“But landlords’ fear of having a tenant with rent arrears is genuine, thanks to reforms and cuts to housing benefit which increase the risk that claimants miss payments. The government must review its housing benefit and universal credit policies to ensure that no one can accidentally fall behind on rent. One option to prevent discrimination against benefit claimants could be to beef up rent guarantee insurance – if all landlords had to buy it as part of registration, and the government underwrote it, the premium would fall.”

Councils have plenty of accommodation for rogue tenants

“Tenants with unavoidable reasons for arrears should be protected and accepted as unintentionally homeless by the council if evicted. Tenants who deliberately break their agreements would have an incentive to move out promptly, before they received a court order.”

Good riddance to landlords who might want their properties back sometime

“This should assure most landlords, but those who simply don’t like extra security for tenants will probably leave the sector. Good.”

Now the crucial fallacy: For every tenant evicted due to a sale, a renter will become a first time buyer

“We’d obviously prefer them to sell with sitting tenants to avoid upheaval, but even if they instead sold to owner occupiers, it would have a neutral effect for tenants overall. It would reduce the supply of rented property, but, by freeing up homes for first-time buyers, it will also cut demand for rented property.”

“The size of the private rented sector is already shrinking, following recent tax changes for landlords which has led to a reduction in buy-to-let demand. But we have seen that this fall in supply has not affected rents, because people have moved from renting to owner occupation at the same time.  We published a paper examining this in more depth last month.” Click here

It was based on a flawed report by Craw. Click here

This report is the nonsense that emboldens GR to demand things that will drive landlords out of the market and drive up rents. He claimed that the rent increases that were actually applied were decreases, because they did not beat consumer price inflation.

Property118 published an article pointing out its flaws Click here. In the comments section other landlords provided examples of breaches of Craw’s Law.

Subsequently, someone commented under the GR blog. The comment started with “Speaking as a professional economist, I can say this is a flawed piece of analysis. And I can confirm that, ceteris paribus, a fall in the number of landlords will lead to higher real rents.”

Generation Rent are fooling themselves that their demands will not drive up rents. Does nobody there understand economics and the housing market?

Well, one of the trustees of GR is an economist and housing market pundit Ian Mulheirn. Craw thanked him for advice throughout the drafting process of his report.

In November 2016 Oxford Economics published a report for the Redfern review into the decline of home ownership.  It was called “Forecasting UK house prices and home ownership”. You can download the report from this site: Click here

The only name on the report is Ian Mulheirn, and it provides his email address for anyone who would like to contact him.

On digital page 16 it reads “Rental prices adjust to match the supply and demand for housing services— places for people to live—in aggregate. Changes in the size of the private rented or owner occupied sectors do not affect this balance, since they do not change the overall number of dwellings or households. For this reason, shifts in the distribution of tenure type do not affect rental prices. For example, if someone buys five houses and rents them back to their former owner occupiers, the private rented sector has grown by five, but the balance of households to dwellings, and therefore rental prices, is unchanged.”

The basis of Craw’s Law, approved by Mulheirn, is that if a landlord sells five properties, then somewhere five renting households become owner-occupiers. Click here

On page 4 of this he wrote “In other words, the relative size of the private rented or owner occupied sectors has no direct bearing on the prevailing rent. Consequently landlords exiting the sector by selling their properties will not affect market rents.

The reason for this is that the supply of and demand for the private rented sector and that for owner occupied houses are intimately connected. Houses are either owner occupied or rented, so if landlords trying to sell do not sell to another landlord, they have to sell to an owner occupier. That household will either be a first-time buyer, or an existing owner occupier moving house and involved in a chain that ends either with a landlord or a first-time buyer.

The net effect is that the total number of properties in the PRS can only fall by landlords selling (directly or indirectly) to first-time buyers, who will by and large be renters. As landlords exit the market they therefore cause a reduction in the supply of private rentals that is matched by a corresponding fall in the demand for private rentals. The balance of supply and demand in the rented sector, and hence rent, therefore remains unchanged (his emphasis)”.

Sadly for GR, Mulheirn’s “proof” is fatuous. It is a simplistic and highly unlikely case in which none of the occupants moves out, and nobody else moves in. In the real world, when an owner-occupier does move out the balance of households to dwellings can easily change. For example when I bought two large houses from owner-occupiers they did not become tenants, and the houses became home to three times as many people as before. They allowed new, single person, households to form when people moved out of their parents’ homes, or came from Europe to work. The overall number of dwellings did not change but the number of households increased.

But Craw’s Law/Mulheirn’s Theorem is even further away from what happens in the real world when a landlord sells. Firstly, it assumes that for every renting household evicted due to a sale there is another renting household that is able to get a mortgage. This is unlikely as there is no correlation between the two factors. Secondly, for various reasons which I described in my previous article, the number of tenants evicted will tend to exceed the number of FTBs at the bottom of the chain. Thirdly, not all FTBs will have been renting. And finally, some dwellings have left the PRS without being sold to owner-occupiers; instead, the landlords switched to holiday lettings or sold to buyers of second homes. In these cases the eviction of renters does not result in a single renter buying.

For these reasons, as landlords leave the market the number of renters evicted will exceed the number of renters who buy. Rents will rise, and the poorest renters will be put into “temporary” accommodation.  Once Pandora’s box is opened, not even the intellectual giants of Generation Rent will be able to get the genie back in the bottle.

Ian Mulheirn is Director of Consulting for Oxford Economics. If you need an analysis of the economics of housing, other economists are available.

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