Reforming the housing market: a landlord’s view

I have been a landlord. From this experience, I have learnt that the property rental market is very sensitive to changes in supply and demand.

Sadiq Khan’s Tooting may be an area of housing stress, as he set out on Fabian Review Online. It has a mixed population of all sorts, it has good access to central London and demand for rental properties must be high.

However, the supply appears to be limited, with most being family houses around 50-150 years old.  Many were snapped up, cheap 50 years ago; some are converted into flats, though this sort of conversion is not ideal. Increasing the supply would be difficult without large scale demolition and rebuilding. So, supply will be restrained and rents will remain high.

Quite simply, if you want it but can’t pay for it, you won’t get it. That is what a market economy is all about.

The “London-wide lettings agency” Khan calls for might help but there are plenty of agents around already who try and make a living by matching, to put it cynically, unsuitable tenants with ‘greedy’ landlords. However, letting has moved on. Gumtree and other such websites match people with property. Landlords avoid paying for dubious quality service from agents.

Ann McKechin has some useful ideas on the supply side. Quite frankly, present legislation and practice regarding home ownership and rental is a mess. Jonathan Reynolds’ ideas on co-operative housing tenure are well worth pursuing but I have one caveat. A lot of people just want a place to live in. They do not want to be bothered with the (often very arduous) business of management and repairs. Allocation of cost will never be easy. However, the law needs to be changed to accommodate his ideas.

As for buying, often have I groaned when I hear politicians talk about the “housing ladder”. House prices over the last 50 years or so have been pumped up by lax credit control by government and, more recently, bank lending stimulated by improper incentives and fees to participants in the house-buying process. The result was that housing became a one-way ticket to riches. That was bad.

However, voters, especially those in middle England, would not like it if property prices halved from what they are now. This means that prices need to be massaged down to affordable levels if rental is ever to become cheaper, but that will not choke off demand, so it would take a long time and it would not encourage building.

Going back to the supply/demand conundrum, I would say that demand reflects jobs, which are obviously a major political problem. On the supply side I list some suggestions which could increase the supply. What one is looking for are things that make the market work better. People’s housing needs change during their lifetimes, as does what  they can afford (incidentally, see Robert Shiller’s work on lifetime variable mortgage rates).

There are some tough choices here and HM Treasury will have to see that making economically efficient changes is more important than wincing at specific losses in revenue. Although there may still be bad landlords, the balance of advantage in law is not such as to encourage new entrants to the rental business. Here are the basic points, without going into the full arguments:

1.  Build more…
2. …but facilitate transactions by cutting, or eliminating stamp duty on transfers of property (as an alternative to stamp duty, you can have an annual capital tax, as in Switzerland)
3. Encourage supply and release of underused properties by:
   (a) tightening up the law on delinquent tenants, both as to rent arrears and as to damage
   (b) changing the law so as to allow more flexibility in short-term lets
   (c ) changing the law so as to stop tenancies inadvertently becoming long-term ones without the agreement of both parties
   (d) changing capital gains tax and inheritance tax, so as to facilitate the provision of ‘granny’ flats
   (e) introducing better forms of proportionate ownership of property – so as, for example, to allow proportionate ownership of residential homes for the elderly; and so     people can retain a stake in property without having to be fully responsible for the place
   (f) clean up the administration of housing benefit so that landlords are not frightened of taking housing benefit tenants.

An increase in supply of rental property will only occur when institutional investment becomes widespread. At present, really only student accommodation is covered (new-build, supervised accommodation and guaranteed vacancy at the end of the tenure), but I see no signs of institutions becoming interested in the present state of the legislation (and the economy). Rental is a mucky, time-consuming business. It is really only profitable if property prices are sharply rising, or you bought a long time ago.

David Winnick is right to propose a substantial council house/flat building programme to increase the supply of housing. That and the right to buy raise important financing, fairness and abuse issues, as the country moves away from the ‘privatise the lot’ way of thinking towards a realisation that the state has an important role to play in the economy.

And, while we’re at it, we should look closely at the matter of non-doms buying places in London, to park their cash, but not live in them. This has had a dire effect on many aspects of London life and raises questions of what sort of Britain we want – a matter for discussion on another occasion.