Buy-to-letOct 24 2018

Rebuilding the rental market

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Rebuilding the rental market
Gareth Fuller/PA

The private rented sector has such political importance, the chancellor needs to use his Budget to support both tenants and good landlords. 

One-fifth of households are now in the private rented sector, of which almost 40 per cent include at least one child. While they still make up a large proportion of tenants, the era of the rental market being one chiefly for young, single people is over. 

At the Residential Landlords Association’s fringe event at the Conservative Party conference, the housing minister, Kit Malthouse, spoke of the need for the sector to address its reputational issue.

We are fully aware of the challenge. There are a small minority of landlords who ignore the law, bringing misery to their tenants and undercutting the majority of good and decent landlords. They bring the sector into disrepute and need to be rooted out for good.

But the government’s own figures show that 84 per cent of private sector tenants are satisfied with their accommodation, compared with 81 per cent in the social rented sector.

Some 72 per cent of private tenants were satisfied with the way their landlord carried out repairs or maintenance, compared with 66 per cent in the social rented sector. This should not lead the sector to be complacent, but it does confound many of the perceptions surrounding private rented housing. 

Key Points

  • One-fifth of households are now in the private rented sector
  • The supply of homes for rent is now falling
  • The government should revoke its decision to restrict mortgage interest relief for landlords to the basic rate of income tax

Tax inequality

Against this backdrop, there is perhaps more than a sense of irony around the words spoken by the housing minister, given that many of the tax changes faced by the sector, and introduced by the previous chancellor, have reinforced a negative perception of landlords.

The decision to restrict mortgage interest relief for landlords to the basic rate of income tax, a new stamp duty levy on the purchase of additional properties and higher rates of capital gains tax in the residential property market compared with that charged on businesses, have fuelled the falsehood that landlords are to blame for the housing crisis. 

There is an argument that such changes somehow level the taxation playing field between landlords and home owners, yet as the Institute for Fiscal Studies noted in 2016: “The tax system is not, and was not, even before the recent changes, more generous to people buying to let.”

Later in the same year, a report by the London School of Economics for Paragon Mortgages went on to quash the other myth the tax reforms were designed to address, namely that landlords are buying up properties that could have gone to first-time home owners.

The report noted: “The (very limited) research into direct competition between investors and putative owner-occupiers has found that only a minority of property sales to landlords nationwide involved bids from both types of buyer.”

It went on to observe: “In many markets there is no meaningful competition and first-time buyers on modest incomes can readily afford [to purchase] homes.”

The lost generation

What has been the effect? The Royal Institution of Chartered Surveyors’ latest data points to “a further decline in fresh rental stock coming to the market”, while “tenant demand continues to rise firmly”.

The government’s own statistics point to 46,000 private rented homes having been lost in England in 2016 to 2017 and an analysis of survey data by the RLA’s Research Exchange, Pearl, suggests a potential loss of more than 130,000 private rented homes over the next year, attributable to the tax changes.

A generation of young people are now facing a housing market where the supply of homes for private rent is falling, they are unable to afford a home of their own and more than 1m households are on the waiting list for council housing. If we are to prevent people being left with no option other than moving back in with their parents, we need to look more positively on the private rented sector, and that begins with taxation. 

A new deal?

First, let us consider supply. It is absurd that landlords wanting to invest in new rental stock are being penalised by the stamp duty levy. At the very least the levy should not be applied where landlords invest in property adding to the net supply of housing. This could include bringing empty homes back into use, converting larger homes into smaller, more affordable units, or developing new property on small plots.

The government should also revoke its decision to restrict mortgage interest relief for landlords to the basic rate of income tax. 

In Ireland, a similar policy has been overturned, with full mortgage interest being reintroduced from next year, two years earlier than originally planned, because of concerns about the supply of rented homes drying up. Second, let us look at security for tenants. Landlords are not averse to longer tenancies. Indeed, as with tenants, many prefer the stability. What is not needed is legislation to impose longer tenancies.

It is vital that we are able to retain the flexibility the sector provides to enable people to quickly access new work and educational opportunities.

With the government’s own consultation arguing that financial incentives could see longer tenancies come about far quicker than via legislation, we are calling for tax relief on rental income that could increase each year a tenancy continues, up to a maximum of five years if the tenancy is renewed. 

Third, there should be support for sales to tenants. There are clearly many reasons why landlords might sell property and we welcome the think-tank Onward responding positively to the RLA’s calls for smarter taxation of the sector.

While Onward has called for the use of capital gains tax relief, split between the landlord and tenant as a way of encouraging the sale of rental property to tenants, we believe such a model would be complex to administer and open to being gamed.

A more pragmatic and easier-to-process solution would be a refund on the stamp duty levy for additional properties, where a landlord is prepared to sell a property to a sitting tenant.

This could apply also to situations where landlords are prepared to sell a property to another landlord with tenants in situ, thereby ensuring tenants are not forced to leave a property when sales occur, as many agents encourage.

The chancellor has an enormous task on his hands, to strike a deal for the private rented sector that works for tenants and the good landlords the country needs. A long-term, sustainable settlement is there to be reached. It is now time to deliver.

David Smith is policy director of the Residential Landlords Association