Rent Controls – Should we be scared?

At the time I sold my last business in 2013, I was renting a house. I had owned, extended and refurbished many homes before and had also owned a portfolio of flats. But when the money from my business sale hit my bank account I did not own any property. It was a life-changing sum of money.

So, it was with some amusement that I received the officious e-mail from a 23-year-old employee of a letting agent stating she was coming to inspect my property at 10 am on Friday 15th and, if I was not there, I would be charged a penalty fee.

These inspections took place quarterly and the quarters came around very quickly. I always treated her with the reverence she craved and gave her that much-needed moment of prowess. It cost me nothing more than a smile and the removal of a few candles!!! (clause 6.4.ii. of AST).

But when the boiler failed I waited two weeks for a plumber to come round, knowing my plumber mate from the pub would have come within a day, the bemusement turned to irritation.

When the family dog needed to stay for a week due to my ex-wife’s holiday the agent demanded a further deposit and immediate inspection thereafter for the privilege, the irritation turned to outrage.  I contacted the owners directly who quickly poured oil on the waters.

Whilst these matters can be shrugged off as little people doing little things, the underlying cultural attitude could not be ignored. This was exemplified by my next door neighbouring ignoring my moving-in note through his door and then continuing to ignore me for the full period of my tenancy, only to approach me in the pub to chat, when he learned I had been building a large house in the village to move into.

Meanwhile, I had embarked on building a property portfolio and my experience was influential in the manner that I treated and still treat my tenants. The underlying principle is “my house, your home”. Those four words answer most questions about how landlord and tenant relationships should be.

There was, and still is, a cultural class difference between renters and homeowners. For as long as renters are considered second-class citizens, as I was ten years ago, landlords should expect a harder ride, some deservedly so.

Renters are commonly treated as second-class citizens, yet they are not second-class citizens. As long as that conflict remains, then the road to landlording will not be as smooth as it could be. Common respect is all that is required to resolve the conflict but, whilst a class divide remains, the governments of all colours will continue to use the blunt instrument of legislation to manage the issues arising.

I would regularly argue myself to the point of unpopularity on social media with those accidental landlords who felt they provided tenants with the privilege to live in their house and expected to have control over the manner of how the tenants lived in it. Only a few weeks ago a landlord was complaining, with genuine concern, that a tenant was smoking cannabis in his back garden. Landlords who are emotionally attached to their assets have no place in the industry of accommodation provision. Period.

So when landlords became outraged at proposals against banning pets, or the removal of section 21 notices, I simply argue that it is levelling the class playing field between owners and tenants. That can only be a good thing for both parties.

The ability to choose the tenant is where the line must be drawn. I am not in favour of being forced to take on benefits tenants. The PRS has its resource limitations and there are some tenants that the state or certain institutions must better resourced to accommodate than an individual protecting his pension.

My viewpoint was influenced by living for a while in Germany, where tenants outweighed landlords to a much larger degree. It was perfectly normal for middle-aged high earning citizens with grown-up children to be renting their home. The protection of tenure afforded to German renters made it desirable to remain renters. There was not the drive to become homeowners that exists in UK. That same protection of tenure made it viable for tenants to modernise their home and invest in their improvement in a manner that you do not see in UK.

But as the freedoms of the landlord get slowly whittled away by legislation with varying consequences, good or bad, the big cloud on the horizon is rent controls. Now wouldn’t that be a game-changer?

We had to face the prospect in the election of 2019 when the loony left was pitching themselves against Boris. The landslide victory was not forecast by many and certainly would not have occurred without the Brexit trump card that was played.

As I write, the Portuguese government is proposing rent controls, which will be debated next month and probably introduced, as they face a communist opposition that is gaining popularity.

But the proposals actually appear to be rather reasonable. Rents must not rise by more than x over inflation unless the property has undergone significant improvements then they can rise by up to y%.

The issue here is whether the existence of control is the problem or whether it is how controls are implemented. In the recent example that the Scottish government introduced there was no consideration for the fact that many landlords actually charge below-market rent. The longer the tenant is in the property the further below market rent they are likely to pay. Being hailed as a temporary measure, the government has come to realise that it has eroded its trust in landlords and as soon as the measure comes to an end, thousands of properties will be hiked to market rent. The result will be that the intervention actually results in increased rent. The only option left to the government is to make the temporary measure permanent, which is the likely outcome.

A control on rent is not in itself a problem. The level of control can be problematic. I view the former as political and the latter, economic. This is why I believe it is likely that the current UK government will introduce rent controls before the next election. There are far more tenant votes to be won, than landlord votes to be lost.

Making such a change in this parliament will not only take the wind out of the opposition’s sails but be akin to removing a sail completely.

Landlords have lived with rent controls as long as they have been landlords. It is called the market. Supply and demand have interacted to establish rent levels with a general trend of the former being lower than the latter. There is no sight of this changing in the future.

If interventional controls are made that reduce the rent from the market rate, then pressure will naturally be created. As landlords lose the choice of the price, they will gain the choice of tenant quality.

But any government will need to be ever vigilant of the economic consequences. Rents and values are inextricably linked. It is not possible to suppress one without the other. To reduce the value of the property market would be to create a manyfold contraction of market activity. When the price of bread changes, the number of bread transactions remains constant. Even if the price drops through the floor, there is only so much bread one can eat. When property prices drop the transaction numbers can change by a power of ten. The market stagnates. No one wants to buy property in a falling market. Whilst first-time-buyers moan over their Starbucks about affordability, they do not wish to buy a house that will be worth less in the future. They would rather rent.

With a stagnant market, mobility is affected, the ability to raise finance and invest is affected and thus productivity and GDP growth is affected. This is not the desire of any government.

Furthermore, most MPs across the house are also landlords and it is likely that their altruistic principles don’t reach as far as their pockets. Political parties gain power on principles and retain it on pragmatism.

I believe rent controls will be introduced and used with great caution. They will provide the political capital in times when demand is outstripping supply and prevent the PRS from raising rents significantly out of kilter with affordability, but stopping short of influencing the property value market as a whole.

The pendulum of landlord bashing is well past the vertical and the mood is changing to one of encouraging investment to match increasing demand. John Lewis and the other institutional investors will need continued encouragement that excessive market price intervention would counter.

Furthermore, intervention in rent would result in lower standards of property maintenance, which would be a backward step in equating the cultural difference between owner-occupier and tenant.

The fear of rent controls and a Labour government in the next couple of years is definitely influencing the exodus of landlords. But those landlords that remain should not expect such a harsh time as feared. Who knows, if we can arrive at a place where a tenant has true security of tenure, then maybe it will be the tenant that replaces the carpets or puts in a new kitchen in the future. However, It would help to remove that “no candles” clause from the AST!

It amuses me to consider a scenario that a mortgaged homeowner receives a letter from their lender stating “it has come to our attention that you have recently introduced a puppy to your home, which is contrary to clause xxx”

Food for thought when considering whether tenants are truly treated with the respect they deserve. We come with nothing, we leave with nothing. It is what happens in the middle that counts.

EDITORS NOTE

Rupert Chapman is a private property investor. He runs a membership support group for property investors called Unity. Unity members communicate daily on a closed forum and have weekly online meetings to provide experienced answers to assist each other with their projects. 

For more information about Unity CLICK HERE

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