Housing and Planning

Why Labour’s rent and ‘ghost home’ proposals won’t make renting more affordable

Over the past week, the Labour Party has announced new policies on housing. Billed as attempts to help alleviate the ‘cost of living crisis’, the proposals comprise three elements:

– Tenants will have security of tenure for three years after the first six months of a rental agreement. As such, three year tenancies will become standard.

– Rent increases will be tied in some way to the average of market rent increases after the initial rent is determined until the tenancy comes to an end.

– Local councils would be given the power to double the council tax on empty – or ‘ghost’ – homes (which the party believes are being hoarded by wealthy foreigners). Developers would also be banned from marketing apartments to foreigners before Londoners have been given a chance to buy them.

None of these interventions would help bring down rents for tenants or improve the affordability of housing.

Tenancy and rent controls

To see why these policies will not have the effects of reducing rents or improving the affordability of housing, let’s try to put ourselves in the position of three different individuals: a landlord in a London area seeing strong house price and rent inflation, a tenant looking for a property in a London area seeing strong house price and rent inflation, and an oligarch who owns an empty property in an expensive London area seeing strong house price and rent inflation.

Given that London has experienced house price inflation of 17.7 per cent over the past year, these are not unrealistic scenarios. But the condition of strong house price growth is used here as one condition so that the constraint on rents is a binding constraint – otherwise the policy of limiting rent increases would have no effect. I am also assuming that the ‘average market rent’ would be set such that the constraint is binding too.

Larry the landlord: As a landlord, I know I can’t adjust my rent each year according to market conditions. Therefore, before the three year tenancy starts I have to make a judgement as to what I expect rents to be. If I expect that the market rent will increase by more than the average used to determine the rent control, I will front-load the rent level to compensate for the future loss. Thus, the rent I set will be higher in year 1 of the tenancy than it might otherwise have been. Once the tenant is in place, if market rents do rise more rapidly than the average to which the rents are tied, I have an incentive to encourage the tenant’s departure so that I can get a new tenant and increase the rent. Since I am unable to end the tenancy without good reason within three years or increase rents, I might decide to become less cooperative with the tenant, by doing things such as not responding to their complaints, or dealing with their problems, or indeed undertaking maintenance.

Tony the tenant: As a tenant, the incentive for me is to stay in the tenancy as long as possible in order to lower the real rent. This increases the degree of lock-in I feel. If I get to year 2 and get offered a new job somewhere, I am less likely – all else given – to move given my relatively lower real rent in year 3. Being evicted is costly for me in the later years, not just because of the direct moving costs but also because of the increased rent I will have to pay on a tenancy. I also realise it’s in the landlords interest for me to go as the real rent falls, so I am incentivised to pay the rent on time. There are also marginal incentives for me to illegally sublet in the later years of the tenancy in order to capitalise on the rent being below the market rent, though this has to be weighed against the cost of being caught and evicted!

Therefore, it is clear from the landlord’s perspective that, at best, these rent controls change the timing of rent increases, not their magnitude. These rent controls do not make renting more affordable. At the very worst, they might incentivise landlords to try to encourage early departure from a property by making a tenancy unpleasant – particularly if it is a bad tenant. Indeed, the proposals may raise rents by raising the risk and raising the required return on capital to landlords. In terms of distributional impacts, unlike classic rent controls there is no excess demand. Rents are freely set in the medium term. But, more mobile tenants will lose out relative to less mobile tenants. At best then these rent controls can be seen to marginally improve security for longer-term tenants, but with a host of other consequences.

Ghost homes

Consider Oli the oligarch who is the owner of one of the 21,852 number of long-term vacant properties (empty for a year) in London in 2013. This is 0.64 per cent of the total stock (and falling in recent years). Readers who read the newspaper headlines relating to Labour’s proposals which suggested that 60,000 properties would be affected might be puzzled. But, as Allister Heath pointed out, their figures are wrong. Oli has decided to leave his property empty and forgo a vast amount of possible rent (he possibly cannot be bothered with the hassle of tenants – increased hassle given the proposed new fixed term tenancies – and is happy to just reap the rewards of an increasing property price). A doubled council tax is a small marginal cost compared with the foregone rent. Only in the event that the extra council tax charge proves the final straw in tipping the cost-benefit equation will Oli decide to let his home.

Labour have trailed the ‘ghost home’ proposals as if they will have a significant effect on supply and that the extra council tax threat will lead to better use of scarce property. But, as we’ve seen, the properties this would apply to are a tiny proportion of the current stock. Furthermore, it is unlikely to fundamentally change the decision making of those deciding to leave a property empty. This may make it a less distortionary way of raising revenue, but the tax yield is likely to be small too and the tax will require an administration. If one was really concerned about the allocation of existing stock, you might consider overhauling our tax system and taxing imputed rent. Alas, Labour do not advocate this.

Overall then, none of these proposals does anything of significance to address the structural reasons why house prices and rents are so high. On the supply side the problem is that London cannot grow because of planning laws and green belt legislation. On the demand side, monetary policy – especially QE – has the express intent of increasing asset prices. This, and policies such as the government’s Help to Buy scheme, increase demand in the face of unresponsive supply. Rent controls and council tax increases for empty homes simply will not improve affordability.

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.

1 thought on “Why Labour’s rent and ‘ghost home’ proposals won’t make renting more affordable”

  1. Posted 14/09/2014 at 17:48 | Permalink

    I cant afford to work in London, my housing association flat costs 240 per week, I can not afford to work.

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