FT warns landlords away from Labour government

In the news - Javid's 'end to austerity', FT's Labour warning, Pets pushing up rents and the REAL reason house prices are so high;
Black and white photo of Parliament

The Financial Times is warning landlords in the private rental sector of the possible impact of a Labour government, should they win in a snap general election.

They have highlighted messages coming from the Labour party, which have a strong leaning towards tenants and against the buy to let market.

The evidence to suggest that this is the case has come from various messages shared by the Shadow Chancellor, John McDonnell.

Mr McDonnell has said he would like to see a Right-to-Buy scheme for private tenants, where the purchase price is derived by criteria set by the government:

“You’d want to establish what is a reasonable price, you can establish that and then that becomes the right to buy,” further adding “You [the Government] set the criteria. I don’t think it’s complicated.”

Having invested personal funds to buy investment property, this is demonstrably not at all favourable to private landlords.

If landlords are put in a position where they may have to sell for less than market value, not only would ongoing rental income be lost, but also the potential for capital appreciation.

Jeremy Corbyn first mentioned the concept of a private right-to-buy scheme during his challenge to lead the country in 2015.

John McDonnell has since described this as a positive solution to reversing problems caused by policy imposed by Margaret Thatcher.

In a housing market failing to deliver property in the volume required by the country, and with houses still not being affordable for many, those within the sector argue the importance of it housing the nation.

Mr McDonnell’s view is at odds with this:

“We’ve got a large number of landlords who are not maintaining these properties and are causing overcrowding and these problems. In my street now, a third of the houses are right-to-buy, badly maintained, overcrowded; it’s horrendous.”

It is this sort of sentiment at the heart of the message from the Financial Times. Whether this would come to fruition with a Labour government at the helm, is a risk that landlords may not wish to take in any election vote.

Bank notes

Sajid Javid’s ‘end of austerity’ financial review

On Wednesday 4th September 2019, Chancellor of the Exchequer Sajid Javid, outlined his plans for spending in the financial year 2020/21.

Mr Javid opened his speech recognising the current “unchartered waters” and with a proclamation on an end to austerity.

He also referenced the current political turbulence around the exiting the EU on a No Deal basis:

“…without the ability and willingness to walk away with No Deal, we will not get a good deal.”

The Chancellor went on to express his confidence in the future:

“Brexit will allow us to reshape the British economy and reaffirm our place as a world-leading economic power.”

Going on to say that:

“Even if we leave with No Deal…

"…I’m confident we will be able to secure a deep, “best in class” free trade agreement with the EU…

"…and we will be able to pursue a genuinely independent free trade policy with the rest of the world.

"Deal or No Deal, Mr Speaker – I’m confident that our best days lie ahead.”

With his first stipulations on spending, the exit from the EU was the focus, allocating £2 billion of additional funds for Brexit preparations.

Summary of spending for 2020/21

Brexit

Brexit delivery

£2 billion

Spending

Capital spending

£1.7 billion

Police and criminal justice

Police recruitment - 2020/21 (6.3% increase in real-terms spending)

£750 million

Police recruitment – immediately to secure 2,000 officers by end of March 2020

£45 million

Crown Prosecution Service (5% increase in real-terms spending)

£80 million

Local authorities

Social care (new funding on top of existing £2.5 billion social care grants)

£1.5 billion

Homelessness and rough sleeping (13% increase in real-terms spending)

£54 million

Town centre regeneration

£241 million

Environment

DEFRA (Department for Environment, Food and Rural Affairs)

£432 million

Air quality

£30 million

Biodiversity and Blue Belt programme (protection of marine species)

£30 million

New funding for the Department for Business, Energy and Industrial Strategy will be announced later in 2019, focussed on climate change.

Education

Special education support (11% increase on last year)

£700 million

Increase in 16-19 further education funding

£400 million

Increase in early years funding

£66 million

School spending to increase by £7.1 billion by 2022-23. Teacher starting salaries to rise to £30,000 by 2022/23. £1.5 billion per year allocated to teacher pension contributions.

Transport

Bus services

£200 million

NHS and health

Increase in NHS spending

£6.2 billion

Frontline NHS staff

£210 million

New capital finding - 20 hospitals to be upgraded and £250m for AI technology

£2 billion

Defence

Real-terms YoY increase of 2.6% for defence, extra

£2.2 billion

Normandy Memorial Trust and Office for Veterans' Affairs

£7 million

Support for all nations

Scottish government (plus £160 million for Scottish farmers)

£1.2 billion

Welsh government

£600 million

Northern Ireland Administration

£400 million

Terraced city street

Enforcement key to PRS improvements

Enforcement, not more regulation, is the answer to improving standards in the Private Rental Sector, according to the National Landlords Association (NLA).

In September’s London Assembly Housing Committee meeting, a key item for discussion was the Decent Homes Standard and Private Rentals (a copy of the background report can be found on the Assembly’s website).

The first question to the invited panel of industry experts, was whether new legislation and initiatives introduced in recent years to protect London’s renters, has resulted in any improvement.

Meera Chindooroy, Policy & Public Affairs Manager of the NLA referred to English Housing Survey reports, saying that the results recorded show that there have been improvements over the last 15 years.

Ms Chindooroy observed, though, that the legislation is inconsistently enforced across London and that some councils - for example - are undertaking a large volume of inspections, but are not inspecting the right properties.

As a result, criminal landlords are getting away with operating sub-standard rentals, without being removed from the sector, where other landlords are being inspected when there are no issues to be found.

For these reasons, enforcement was very much proposed as the key to affecting positive change in the sector, by the NLA.

David Beach, Director of Regulatory Services for the London Borough of Waltham Forest, highlighted a range of challenges that local authorities face in trying to uphold the powers they have.

These ranged from tactics used to obstruct legal proceedings, to unpaid penalty payment programmes.

Furthermore, the resource required to pursue a prosecution was often costing more than the penalty being pursued, because there are not suitable measures in place to stop issues like spurious and unfounded appeals.

A webcast of the two-hour meeting of the London Assembly Housing Committee meeting can be reviewed online here.

Dog sitting on the grass

Pets push up rents

Since June 1st 2019, when the Tenant Fees Act came into force, a new way to cover the cost of pet damage appears to have come into play – higher rents for tenants with pets.

Prior to the ban, landlords were able to secure a higher damage deposit, to mitigate the risk of animals living in a rental property.

However, pet fees/deposits are banned in the Tenant Fees Act. So, rather than charging a sum that could potentially be refunded, some landlords are instead increasing rents.

Given an increase in rent is a non-refundable sum, this works against the tenant.

Renting, where pets are part of the tenant family, has typically been a trickier route to finding a suitable home. This is because many landlords have sought to avoid the issue completely, by not accepting animals in their property at all.

In the run up to the Tenant Fees Act, it was widely acknowledged that tenants with pets may well pay the price as the dust settled.

Pet popularity is high in the UK, 50% of UK adults own one. Statistics from the PDSA show that cats are owned by 11 million people and dogs by 9 million.

In England, a quarter of families rent.

These numbers suggest that tenants likely to be affected by rent hikes for pets is significant and contrary to the intention of the ban.

In the past, the Dogs Trust offered a number of solutions to the problem, including pet references.

The suggestion that landlords could ask for pet references, from previous letting agents or landlords, may seem laughable for the tenant. Landlords may also argue that the protection it affords is slim.

With other costs mounting up for landlords and a decidedly shaky political environment, attitudes to risk may well be unforgiving.

A future where refundable pet deposits are reinstated might be welcome all round from landlords, agents and tenants.

Housing estate from the air

Housing crisis is not a supply issue

A strongly worded paper, by Ian Mulheirn, Executive Director and Chief Economist at the Tony Blair Institute for Global Change, expresses this view.

The paper was published at the end of August 2019.

On 6th September, representatives of the Bank of England (BoE) published a report with a similar message.

Both papers argue that the lack in supply of housing stock is not responsible for the rise in house prices, rather, the low cost of borrowing is the greater symptom of rising house prices.

John Lewis and Fergus Cumming, of the Bank of England, make this conclusion in their report “Houses are assets not goods: taking the theory to the UK data”:

“We find that the rise in real house prices since 2000 can be explained almost entirely by lower interest rates. Increasing scarcity of housing, evidenced by real rental prices and their expected growth, has played a negligible role at the national level.”

Mulheirn addresses specifically the issue of housing supply in the UK:

“…the available academic evidence suggests that no plausible rate of supply would significantly reverse the price growth of the past two decades.”

He goes on to explain that, had the UK met its additional 300,000 homes per year, a change to house prices would be modest:

“This is both because its impact on prices would be limited, and because ownership rates are much less sensitive to prices than they are to mortgage availability.”

Low interest rates debunk supply as cause of house price rises

In 1996 house prices were 4.5 times greater than the median household income and are now 8 times greater.

By contrast mortgage interest rates have shrunk. In 1996, the interest rate on a five year fixed rate would have been in the region of 8%. Today this is more like 2%.

The report by Lewis and Cumming from the BoE looks in greater and technical detail, at the subject of interest rates, demonstrating their crucial influence on house prices.

Lewis and Cumming make the point that, when interest rates are low, asset prices rise because the present value of future cash flows is increased.

In the push-pull of supply and demand, Mulheirn acknowledges that an increase in available housing stock would apply some downward pressure on mortgage rates.

But he makes clear that, unless the cost of borrowing increases, the impact of greater supply would not be significant enough to bring down house prices.

If the government had met the target of 300,000 net additions to housing stock per year, Mulheirn’s calculations show that house prices would only be cut by ten percent over a twenty-year period.

Housing policy implications

Ian Mulheirn outlines four key considerations for future housing policy:

  • An increase in housing stock will only lead to more unoccupied homes;
  • Affordability in the rented sector is the result of slow wage growth, cuts to housing benefits and reduced social housing;
  • The end of low interest rates would impose vulnerability on house prices, as a result of a reduction of overseas investment in the UK;
  • More fiscal intervention is required to achieve stability through a greater proportion of home ownership;

The last point is particularly pertinent to UK landlords, taken verbatim Mr Mulheirn says:

“If financial stability in the mortgage market is to remain a policy priority, a return to higher rates of home ownership will require more fiscal intervention either to subsidise FTBs or to reduce financial incentives for landlords. Either way, recent rapid growth in the number of families in the private rented sector suggests that policy should urgently address the security it offers, and the quality of the service renters receive.”

What does this mean for UK landlords?

Andrew Turner, chief executive of Commercial Trust, drew the following conclusion on the future:

“In the short term it is hard to envisage any change in rates given the furore of Brexit uncertainty, the inverse yield curve in the US and current global trade wars.

“However, in the medium term, as uncertainty dissipates, I expect to see rates slowly edge up to more “normal” levels.

“Hopefully, this will gently release the air from the bubble of unsustainable house prices, rather than burst it with a bang. If this is the case, houses will become gradually more affordable for homeowners, landlords and tenants alike.”

To let sign outside a property

Lib Dems on scrapping Section 21

The Liberal Democrats meet for their Autumn Conference from Saturday 14th – 17th September. One housing issue is present on their agenda for discussion – the scrapping of Section 21.

The Lib Dems are in favour of the move; however, they do recognise the need to reform the court process. It is acknowledged in their conference notes that landlords, who are the subject of tenants breaching their tenancy agreement, need easier access to justice.

The party is calling for:

  1. "The abolition of S21 by reform of the Housing Act 1988.
  2. The reform of court process (as has happened in Scotland) to enable landlords to have easier access to justice in the event that tenants are found to be in breach of their tenancy agreements.
  3. Further work to be undertaken with tenant and landlord organisations and groups to explore the opportunities for further reform and improvement of the private rental sector, such as revising the current assured short-hold tenancy legislation to encourage the use of long-term tenancies as a standard.”

This sits amongst wider sentiment that the Private Rental Sector should be fairer for tenants, focusing on the upheaval, cost and emotional implications on tenants, of Section 21 evictions.

Also acknowledged, is the growing demand within the UK for private rental homes.

You can read the full conference notes here: https://www.libdems.org.uk/f37-reforming-housing-legislation

Pound coins and bank notes

Call for higher CGT for buy to let properties

Think Tank, The Institute for Public Policy Research(IPPR) has this month published their “Just Tax: Reforming the taxation of income from wealth and work”. In it, they call for Capital Gains Tax on buy to let property and second homes to be imposed at the owner’s higher rate of income tax.

The report opens with a statement on the inequality of wealth in the UK and seeks redistribution of it:

“The UK is one of the most unequal countries in the developed world, and income inequality could be set to worsen as capital and property ownership become more important sources of income generation. Redistribution is essential for economic justice. “

In essence, the objective outlined in the paper is to equalise the taxation of income and capital gains and thereby prevent manipulation, via tax planning, of the amount taxpayers pay.

For landlords with large numbers of properties, this proposal could make a significant dent in the long term value of their portfolio. As a result, this could lead to a rise in rents.

Others though are likely to see this equalisation of tax as a fairer approach.

Two key proposals are made by the IPPR to achieve this outcome:

  • Proposal 1: Income from wealth should be taxed the same as income from work
  • Proposal 2: Fundamental reform of the income tax system, taxing all sources of income (earnings, dividends and savings) together and equally under a single tax schedule, with a gradually rising marginal tax rate as income rises.

The IPPR propose that capital gains should be taxed at the same level as income tax. This means:

  • 20% for basic rate taxpayer
  • 40% for high rate taxpayers
  • 45% for additional rate taxpayers

Removal of the £12,000 annual exemption on CGT is also within their proposals, preferring instead to put in place a £1,000 allowance.

At the moment, this is not going through government, but is certainly a subject to monitor.

European Union flags

Post-Brexit Right to Rent planning

In the political melee currently surrounding Brexit, getting Right to Rent right is one of the key issues some landlords face.

ARLA Propertymark have released guidance to try and simplify this very complex matter.

Taking the three EU tenant groups in turn, ARLA have outlined the state of play, come November 1st 2019.

  1. EU nationals living in the UK at present: tenants in this category should be applying to the EU Settlement Scheme, this applies to EU nationals, and EEA and Swiss citizens. With “Settled” or “Pre-settled” status in place, tenants have the right to live in the UK (with differing criteria).
  2. EU nationals seeking to move to the UK after Brexit: in the scenario of ‘No Deal’, the European Temporary Leave to Remain (Euro TLR) plan will be used, allowing eligible parties to live (and work/study) in the UK for up to 36 months after 31 December 2020. Tenants will either have to apply for Euro TLR or via the future immigration system. Those individuals national to Ireland, fall outside of this requirement, because they will retain their Common Travel Area Arrangement right to remain in the UK.
  3. International students: International students are allowed to remain in the UK for two years after the end of their studies, regardless of their employment status.

ARLA Propertymark goes on to make clear that they would expect significant changes to the scheme, post Brexit, if a new Immigration Bill is put into practice, but until then the processing of tenants and tenancies is as per existing legislation.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.