The Housing Question No 4: Reforming renting

This week: A Fairer Private Rented Sector, a Conservative u-turn, Ridley, Rachman, rent regulation

Welcome to the fourth issue of The Housing Question, my newsletter covering everything to do with housing. It’s still a work in progress but let me know what you think and please consider subscribing and sharing on social media if you like what you read.

The road to reform

The government in England is proposing major reforms of the private rented sector that will sweep away much of the policy framework introduced by Margaret Thatcher’s Conservative government in 1988. If enacted, they will abolish fixed-term tenancies and Section 21 no-fault evictions and replace them with periodic tenancies that can be ended by the tenant giving notice or by the landlord applying for possession on specified grounds.

Other proposals include legislating to make it illegal for landlords and agents to have blanket bans on tenants who have children or who are on benefits and to ensure that landlords do not unreasonably refuse requests by tenants to have a pet in their home. The government also plans to apply the Decent Homes standard to the private rented sector for the first time and to consider ways for tenants to be repaid rent for non-decent homes.

The government took its time delivering on a commitment to ban no-fault evictions first made more than three years ago but the white paper drew a warm welcome from tenant and housing campaigners. Landlord groups have generally concentrated on securing changes to the detail (such as new mandatory grounds for possession under Section 8) rather than the challenging the principle of ending Section 21 (a manifesto commitment).

The big exception is the newspaper that Boris Johnson is said to regard as his ‘real boss’. Read the Daily Telegraph over the last week or so and you will have learned that landlords will be forced to become social workers, take dole claimants and to sell up en masse. However, the most critical piece came from Lord (David) Frost in an op-ed arguing that ‘the Tory assault on buy to let is another step on the road to socialism’.

The road to socialism

If, like me, you find it hard to take the former diplomat turned whisky salesman turned Brexit advisor turned minister turned high priest of Thatcherism too seriously, you will find it tempting to dismiss this out of hand. If you are a Telegraph-reading buy to let landlord you may be nodding in agreement and frothing at the mouth at the prospect of tenants being allowed to have pets and no longer being allowed to kick them out for no reason.

Reds under the bed?

But it’s worth pausing a moment to consider the school of thought that Lord Frost represents. For him, the issues with renting are not down to bad landlords but part of a wider problem:

‘They arise because our housing market – if it can be called a “market” at all – is such a mess, and in particular because there is a huge shortage of housing. We don’t build enough houses for the population we have, that population is going up by a million people every three years, and housing is gummed up by a high transaction tax (stamp duty) and property taxes which disincentivise efficient use of what stock there is.’

In this market fundamentalist view, the white paper tackles the symptoms rather than the causes and will exacerbate the shortage since ‘if you can’t be sure you can get your house back, why rent it out?’. Add the scrapping of planning reforms and the result will be ‘higher rents, less choice and worse conditions for everyone’. This is how collectivism spreads, he argues:

‘These restrictions on property rights don’t just hit productivity and growth. By limiting freedom to choose, they gradually change the kind of society we live in. Every step on this road may seem reasonable in isolation. The measures seem justified, the costs seem limited. But there is only one end to the journey: you don’t live in a free society. Instead, you live in one where you can’t use your property as you wish, only as government says you can. That is collectivism – that is socialism.’

There is more in the same pompous vein but essentially he is putting the case for the primacy of property rights over consumer rights in housing. The latter is the one that for the moment has won out among Conservatives but what Frost is saying echoes arguments put by the man who introduced Section 21 in the first place.

A doctrinaire disagreement

Nicholas Ridley was environment secretary under Margaret Thatcher and provided much of the ideological direction for her government. For him, the reforms in the 1988 Housing Act represented the reversal of mistakes dating back to the First World War. As he put it in the second reading debate:

‘If ever there were a subject where political dispute has done grave harm to the interests of the less well-off, it is in rented housing. It is high time that there was an agreed way forward. I do not pretend that this measure will be the last that the House will see of the subject over the decade ahead, but I would rather that in future we were debating how to improve these provisions than to be stuck in the stalemate of a doctrinaire disagreement as we have been since 1915—the year when the first rent restrictions were introduced.’

He outlined what he saw as ‘the chequered history of rent controls’ and even introduced a personal element as he recalled his father’s attempts to reform the system as a civil servant in the 1940s.

The system that Ridley introduced – the assured shorthold tenancy, market rents, Section 21 – was what underpinned the extraordinary growth of buy to let. One thing I found striking about the white paper was the extent to which it rejected the rationale for this system, arguing that:

‘Collectively, this adds up to a Private Rented Sector that offers the most expensive, least secure, and lowest quality housing to 4.4 million households, including 1.3 million households with children and 382,000 households over 65. This is driving unacceptable outcomes and holding back some of the most deprived parts of the country.’

After restoring the rental market, Ridley was determined to unleash the market via reform of planning. He was even credited with popularising the term NIMBY. He planned to maintain the Green Belt while creating new settlements that would be led by the private sector but he ran into exactly the same political obstacles that stymied liberalisers in the 2020s and (like Robert Jenrick) saw his reforms shelved by his successor. This is the wider point that Frost fails to acknowledge in his case for freeing the market from state control. 

Rachman and after

It’s also worth looking back a little further in the history of renting and regulation.

The name of Peter Rachman has become synonymous with exploitative landlordism, although his story is more surprising and contradictory than it might seem. Rachmanism grew out of the deregulation of rents on new tenancies in 1957, which created a huge incentive for landlords to get rid of sitting tenants with statutory tenancies.

Rachman died before the scandal of Rachmanism was exposed in the press but the backlash eventually led to legislation that introduced long-term security of tenure and fair rents for furnished tenancies and made harassment of tenants and illegal evictions criminal offences. The story of what followed is less well known but worth thinking about in a contemporary context because the system remained ripe for exploitation by landlords well versed in evasion techniques and with access to professional advice. As I blogged here, drawing on the work of David Nelken:

‘Landlords could simply exploit the power imbalance with tenants by “persuading” them to sign up for tenancies exempt from the legislation. A rickety table and chairs became a furnished tenancy in the 1960s and a clause in the lease offering breakfast turned a furnished tenancy into a holiday let in the 1970s.’

By the 1970s, MPs were complaining about ‘legal Rachmanism’ whereby a landlord in a block could persuade one tenant to accept a higher rent and then use that as a benchmark for ‘fair rents’ for the rest.

What that strongly suggests to me is that any loopholes in the white paper and legislation that follows will be exploited by landlords – and that however tenant-friendly the new system is power imbalances with landlords will remain.

Challenging rent increases

The white paper explicitly rejects rent control, arguing that:

‘This Government does not support the introduction of rent controls to set the level of rent at the outset of a tenancy. Historical evidence suggests that this would discourage investment in the sector and would lead to declining property standards as a result, which would not help landlords or tenants.’

That caveat about ‘at the outset of a tenancy’ suggests that the authors are aware of the distinction between crude rent controls and more sophisticated forms of regulation in which initial rents are determined by the market and subsequent increases are regulated. The details really matter here and I have a feeling that if private landlords were offered the sort of ‘rent control’ imposed on social landlords under the CPI+1% formula for rent increases they might form an orderly queue.

The white paper also explicitly recognises that security of tenure and rents are linked – otherwise landlords could simply increase the rent until a tenant feels forced to leave:

‘When a landlord needs to adjust rent, changes should be predictable and allow time for a tenant to consider their options. We will only allow increases to rent once per year (replicating existing mechanisms) and will increase the minimum notice landlords must provide of any change in rent to two months. We will end the use of rent review clauses, preventing tenants being locked into automatic rent increases that are vague or may not reflect changes in the market price. Any attempts to evict tenants through unjustifiable rent increases are unacceptable. Most landlords do not increase rents by an unreasonable amount but in cases where increases are disproportionate, we will make sure that tenants have the confidence to challenge unjustified rent increases through the First-tier Tribunal. We will prevent the Tribunal increasing rent beyond the amount landlords initially asked for when they proposed a rent increase.’

This sounds fine but it offers no definitions of ‘unjustifiable’ or ‘unreasonable’ or ‘disproportionate’. If tenants are really to have the confidence to challenge rent increases (a big if given those power imbalances) then tribunals will have to provide one. If they do not have the confidence, then further regulation will be required. This is certainly the experience in other countries.

The experience elsewhere

Around half of European countries have some form of rent regulation, according to research cited in a recent CaCHE briefing paper by Ken Gibb and Alex Marsh. Those with unregulated rents include the former Eastern bloc countries, Finland, Greece, Iceland, Italy, Malta and Portugal. That makes England relatively unusual in western Europe in not having some form of rent regulation and the experience elsewhere suggests that issues of security of tenure and rental affordability are closely linked.

Ireland and Scotland offer the examples closest to home of countries that have re-introduced forms of regulation. In both cases the initial aim was to give tenants greater security but measures triggering rent regulation in pressurised markets were added and this suggest a possible future destination for policy in England. In Wales the co-operation agreement signed between Welsh Labour and Plaid Cymru includes a commitment to a white paper that will include proposals on a right to adequate housing and ‘the role a system of fair rents (rent control) could have in making the private rental market affordable for local people on local incomes and new approaches to making homes affordable’.

Ireland introduced four-year tenancies in 2004 that could be terminated in the first six months for any reason but after that only for specified reasons including non-payment of rent, sale or substantial refurbishment and the landlord requiring the property for personal or family use. A Residential Tenancies Board was established for dispute resolution, registration of tenancies etc.

Since then the system has been progressively tightened. From 2016, tenancies were increased to six years and the landlord could no longer terminate in first six months with no reason. New conditions were set for the termination of tenancies where the landlord wants to sell. Initially, annual rent reviews were limited to market rent but challengeable by the tenant via the RTB. Since 2015 the system has been gradually tightened to reduce rent inflation and Rent Pressure Zones introduced with caps on rent increases. This was further tightened in 2019 to remove exemptions for minor refurbishments and works to bring properties up to minimum standards and from 2021, a limit of 2 per cent or the rate of inflation, whichever is lower, was applied to rent increases in the zones. For more details see this report by Michael Byrne and Rachel McArdle.

Scotland introduced the Private Residential Tenancy for all new private tenancies in 2017.  This is open-ended and the landlord can only gain possession in 18 specified circumstances, such as wanting to sell as well as non-payment of rent. It also provides for more predictable rent increases and for local rent caps in Rent Pressure Zones.

A consultation on A New Deal for Tenants was published in December. This proposes a national system of rent controls in the private rented sector, a new regulator, a minimum housing standard across the social and private sectors, new minimum standards for energy efficiency and zero emissions heating and a right to adequate housing. The grounds for possession are also being reviewed, with the consultation highlighting in particular landlord exploitation of the ground of ‘landlord intends to use for non-residential purposes’ for conversion to short-term lets. A Coronavirus Recovery and Reform (Scotland) Bill has started its progress through the Scottish Parliament would make permanent provisions introduced during the pandemic that make all grounds for possession discretionary rather than mandatory, with a tribunal to rule on whether possession is justified.

So what happens next?

As I wrote in my column for Inside Housing, there is a long road between the white paper, the legislation and implementation.

What looks like a balanced package of proposals from DLUHC will face intense lobbying by property interests as well as housing campaigners. The case will be made again and again that the reforms will lead to an exodus of landlords and pressure will grow to water them down. Landlords can and will exploit loopholes in the legislation because that is where the power lies in the landlord-tenant relationship. The legislation may also add to pressure on the private rented sector to professionalise and move away from being a cottage industry of individual buy-to-let investors.

In his Times column on Friday, James Forsyth maps out more of the divisions over this within the Conservative Party. Some Tories see the by-election defeats, recognise it is dangerous to be seen as the landlords’ party and want to go further, abolishing remaining tax breaks for buy-to-let landlords and giving mayors the power to block more short-term lets. Others take Frost’s view and Forsyth says ‘allies of Boris Johnson’ want to ‘tweak’ the proposals to target the ‘real Rachmans’ (that name again) rather than people renting out a property they bought as a nest egg.

Overall, the white paper looks better equipped to strengthen the rights of renters who are able to exercise choice than it does to protect the rights of the most vulnerable with the least choice. The prospect of making it illegal for landlords and agents to impose blanket ‘No DSS’ bans on benefit claimants sounds great until you realise it does not mention the benefit freezes and caps that encourage them to do so. Landlords will simply be able to block claimants on an individual basis.

Doubts remain about enforcement (under-reported new research for DLUHC confirms a lack of capacity in many local authorities and huge variation between them). The white paper says that ‘misuse of the system and any attempt to find loopholes will not be tolerated’ but history – and the experience of Ireland and Scotland - suggest that any gaps in the legislation can and will be exploited by landlords. That in turn would fuel demand for more intervention.

Just like tensions within the Conservative Party, pressure for wider reform – including the regulation of rents – will not go away.

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