The new rules must be seen in the context of an already heavily regulated market. Tenants are already so well protected that it typically takes several months to remove them if they fail to pay the rent. At the same time, many rental properties in multiple occupation are subject to strict local authority licensing requirements. The government is also considering forcing landlords to check the immigration status of potential tenants, under threat of heavy fines. Hence there are already significant disincentives for investing in the lettings market. Current regulations increase the risk of unpaid rent and expensive renovations to meet bureaucratic rules.
The new policy would introduce further risks. In particular, longer tenancies would place severe constraints on investors’ ability to regain vacant possession in order to sell their properties at maximum value. It will be significantly more difficult for landlords to respond to changing market conditions or changes in their own financial circumstances. This is also a risk for buy-to-let lenders, potentially increasing the number of delinquent borrowers and making it harder to offset losses through repossession and sale. Lenders are likely to charge a risk premium to reflect this.
These additional risks suggest the Tenants’ Charter is likely to be counterproductive. Rental properties will be less attractive compared with alternative investments, deterring investment in the sector and potentially reducing the supply of new housing (buy-to-let investors are major buyers of new builds in many locations). Reduced financial incentives may also mean more properties remain ‘underoccupied’ by home owners (for example, single people in large houses) rather than being transferred into more intensive rental use. Indeed, the increased regulatory risks could mean more homes being left empty rather than let out short-term before an intended sale. It is also predictable that the new rules will incentivise landlords to favour tenants such as students and migrant workers who are less likely to demand long-term contracts than families with children. This will work against the positive market incentives for landlords to let to families, whose relative stability means their tenancies are frequently renewed to the benefit of both parties. In high-demand areas in particular, the new rules may push more families into social housing and even emergency bed and breakfast accommodation.
There are clear parallels with the disastrous regulation of private rentals prior to the partial liberalisation of the 1980s, which saw the sector’s share of dwellings fall to around 10 per cent of the total stock, with negative knock-on effects on investment, quality, labour mobility and social housing costs. It may seem counterintuitive, but the best way to help tenants in the long-term is to reduce the regulatory burden on landlords rather than increase it. And if the government wishes to stabilise the accommodation situation of lower income families, it should liberalise planning and building regulations so far more of them have the option of owning their own homes.