Jack Dromey\’s rental market changes

Here.

And here\’s the danger.

And the current way of operating is not just failing renters, it is also failing landlords. There is compelling evidence that landlords can make a better return through a model that encourages long-termism rather than the short-term market that currently operates. A recent report carried out by Jones Lang LaSalle shows that rental indexing would enhance landlords\’ returns, by keeping rents in line with inflation, and the longer tenures would reduce void periods and cut out letting agents\’ fees.

That\’s all true. And it might indeed make a better market from the landlord\’s point of view. However, it does depend upon what rights of tenancy the tenants get. I certainly would have no problem with the idea of 5 year tenancies. But we\’d need to know two things:

1) What is the notice required? Is it, for example, once you\’ve signed the tenancy for 5 years then the landlord cannot ask them to move out with two or three month\’s notice? If the building (or flat) is sold are they a sitting tenant? Or can the tenancy be voided in that instance?

2) What\’s the process about non-payment of rent? Does the tenancy continue if the rent ain\’t paid? Or does that create a break and it\’s easy to get rid of non-paying tenants?

If anything like the past tenants\’ rights are brought into being then the changes will lead to many fewer people being willing to rent out property.

A, say, 5 year tenancy agreement ain\’t a problem. It\’s all of the other things that surround it which could be. What are the details Jack?

23 comments on “Jack Dromey\’s rental market changes

  1. The 1988 housing act was supposed to usher in a great new liberal era for tenants and landlords alike. Informed and rational customers would discuss terms and conditions over a Mellow Birds, or possibly a Nescaf (Britain didn’t really quite have cappuccino back then) with informed and rational suppliers, agreeing on nitty grittys like who had how much notice to terminate the agreement, how annual rent changes would be determined, and so on.

    Unfortunately reality happened. One of Thatcher’s great liberalising reforms fell to her own statement that you cannot buck the market. The T&C were not negotiated but all dictated by the party with the market power – the landlords. Suddenly every tenant found themselves with the bog standard minimum 6 month assured shorthold tenancy, with the rent (or even continuation of the tenancy) at the sole discretion of the landlord once the 6 months were up, and with no right to terminate the agreement.

    So – where we have such a greatly asymmetrical relationship – is it not worth considering how we regulate such relationships in the interest of the party with no negotiating power? Who we agree it is a good thing that they have somewhere to live and don’t have to move every 6 months? And how we best do this without damaging the landlord’s interests so much that they decide to give up and stop supplying the service we want them to supply?

  2. Britain is also quite possibly the only country in the world where a month’s rent costs more than a month’s 100% mortgage interest on the same property, and yes that was the case when interest rates were much higher too.

    Does anyone still wonder why there was such a property bubble? While those who wanted to buy rather than let found themselves less creditworthy with every passing day due to high rents and less able to buy because of the market their rent was subsidising running away from them?

    These to me are signs that the rental thing in Britain needs to be unfucked fast.

  3. “Britain is also quite possibly the only country in the world where a month’s rent costs more than a month’s 100% mortgage interest on the same property, and yes that was the case when interest rates were much higher too.”

    That’s not uncommon in the cheaper regions where no one really wants to buy, but I doubt it’s the case anywhere in London or the SE.

    I was renting a flat in Bournemouth for a rate less than half the interest on the required capital to buy it and that was at 5.5% or thereabouts. The more expensive the property, the bigger the divergence too.

    I agree the 6 month shorthold thing is not a healthy situation. They seem to be pushed by the agents to ensure they get a regular contract fee every 6 months. As a landlord myself (not in the UK though), I’d much prefer longer term tenants. Isn’t part of this the rights that a ‘sitting’ tenant gains after a certain time? UK landlords seemed to live in fear of that.

  4. Seems to me you can’t “fix” anything about the rental market until we end the regime of State driven supply strangulation.

    Free the land. Denationalise building permission. Until you do that, argument about the details is a waste of time.

  5. On point 1, you can already sell a property with a sitting tenant. There are plenty advertised on Rightmove et al.

    Ian B,
    Freeing up the planning system is nowhere near enough. Let’s say you want to redevelop a whole street of two-storey Victorian terraces in west London. You’d have to buy up the entire block, meaning you’d have to persuade everyone to sell. In Singapore the law is such that you need only buy 80% of properties in a development, then the remaining 20% are legally obliged to sell too. This has worked quite well.

  6. James V

    In the days when I lived in Japan and rented my London flat those sort of discussions over a Mellow Birds (or rather over email) were exactly what happened.

    And all rent discussion power with the landlord. Really ? I can assure you having good tenants who look after the place and no voids makes up for a possible 5% rent hike.

  7. The short hold lease suits small scale landlords, who might sell on, and some tenants, like students. It seems we need something to encourage large scale institutional landlords, who want long term tenants, and who wouldn’t really be looking to sell, or (like commercial landlords) a fully let building would be saleable. Don’t know how though.

  8. I agree with David Moore. When I was renting out a flat in Edinburgh, I was interested in long-term security of my rental income (which about covered the mortgage – especially as we still had mortgage interest tax relief in those by-gone days.) I couldn’t find an agent willing to arrse themselves with anything other than the 6-month short let.

    I let through the Students’ Associations a couple of times but because I was abroad and not able to chase rent by phone, this was too much like hassle.

  9. Have to go along with IanB. Currently find myself looking to arrange a tenancy, here. Minimum’s usually a year but the contracts don’t look dissimilar from UK side. Oversupply of available properties means I can get landlords dancing to any tune I care to whistle.
    The buy-to-let people, I used to service, were getting interest+capital repayment+appreciation+. Hence they pyramided.

  10. Freeing up the planning system is nowhere near enough.

    Sure. But it’s an essential start, and you can’t do anything until you’ve done that. It’s like if somebody is punching you in the face; stopping them punching you won’t solve all your problems, but it will solve the being punched in the face problem.

    et’s say you want to redevelop a whole street of two-storey Victorian terraces in west London. You’d have to buy up the entire block, meaning you’d have to persuade everyone to sell.

    Yes, property rights are like that. If somebody owns something, and you want it, you have to persuade them to sell it to you. This is compared to an alternative sytem called “robbery”.

    In Singapore the law is such that you need only buy 80% of properties in a development, then the remaining 20% are legally obliged to sell too.

    The above is an example of the “robbery” system.

    This has worked quite well.

    Not for the 20% presumably, who have lost their property at below their personal subjective sale value.

  11. IanB>

    “The above is an example of the “robbery” system.”

    Isn’t there some sort of notional ‘common’ which the 20% are actually attempting to grab solely for themselves?

  12. Isn’t there some sort of notional ‘common’ which the 20% are actually attempting to grab solely for themselves?

    Now dance around your computer thrice widdershins. It might not keep the LVT monomaniacs from hijacking the thread but it won’t hurt.

    No need to do it ‘skyclad’ :)

  13. Ian B @ 4:

    “Free the land. Denationalise building permission.”

    No, we don’t want shacks thrown up in National Parks or AONB or just nice countryside – all of which are an amenity for all. However, there’s plenty of scope for creating certain deregulated zones where anyone can build what they like.

  14. JamesV, I don’t understand this repeated 6 months AST with no rights after the 6 months.

    When I’ve rented the 6 months turned into a rolling monthly contract with either side terminating with 1 months notice. Change in rent was 1 month notice too. And when I’ve rented out, it’s been the same. I’ve been on both sides of the renting game.

  15. @JamesV

    Most of your first 2 posts need some more context.

    >The T&C were not negotiated but all dictated by the party with the market power – the landlords. Suddenly every tenant found themselves with the bog standard minimum 6 month assured shorthold tenancy, with the rent (or even continuation of the tenancy) at the sole discretion of the landlord once the 6 months were up, and with no right to terminate the agreement.

    Not true anyway, but T can terminate agreement after 6 months at zero cost. You need to decide whether you want long or short agreements – o flexible, as at present.

    Tenancy length matters more than agreement length – 30% of PRS tenancies are more than 3 years (Rug Review).

    At present I run around 6 properties for family members.

    Our current tenants have been in for roughly 1, 1, 2.5, 3, 4, and 7 years. In the past 10 year tenancies have been common.

    All started on 6 or 12 months without exception, and rolled over onto periodic, simply because signing up for 3 or 5 years from day one is stupid on either side until you have proved it works well.

    >Britain is also quite possibly the only country in the world where a month’s rent costs more than a month’s 100% mortgage interest on the same property, and yes that was the case when interest rates were much higher too.

    Untrue, and apples and oranges anyway. Interest rates are at historic lows, and rental cost always includes 15-30% of maintenance and upgrading, which is not in mortgage cost. Landlords pay for bathrooms, kitchens, paint, central heating and all the rest. Anyone with a mortgage on a small house will be spending at least £1500 a year on these on top, even at a basic level.

    >Does anyone still wonder why there was such a property bubble? While those who wanted to buy rather than let found themselves less creditworthy with every passing day due to high rents and less able to buy because of the market their rent was subsidising running away from them?

    It’s difficult to argue that returns are too high, since low returns are the main reason institutional investors stay out. That and the £20-£30k tax on new planning permissions.

    >These to me are signs that the rental thing in Britain needs to be unfucked fast.

    It already is being, with lower house prices etc. A few tweaks are needed, but the underlying problems are supply of housing, planning, mortgage liquidity and silly regulatory initaitives which do nothing except land costs on tenants.

    The firm divide between the PRS and social housing is a real problem, however.

    @tim

    You can see a more serious version of the ‘sitting tenant at sale’ issue in properties with Rent Act lifetime secure tenancies where the value is reduced by half or more. That introduces a rental market where investors have to speculate on how soon people will die. I don’t see even Labour allowing an existing tenancy to prevent a vacant possession sale.

    >I can assure you having good tenants who look after the place and no voids makes up for a possible 5% rent hike.

    10%, since most LLs allow for one month void per year or take into account that a T change is an extra possible redecoration plus fees and costs, which are usually £400-1000 on top of lost rent.

    The main tweaks we need are an alternative 2-5 year rental contract alongside ASTs, with certain encouragements, and an overhaul of the 2004 Housing Act.

    The problem is that – while Jack Dromey’s proposals are not bad – the wider Labour Party is riddled with anti-PRS nutters like currants in a barabrith.

  16. “It’s difficult to argue that returns are too high, since low returns are the main reason institutional investors stay out. That and the £20-£30k tax on new planning permissions.”

    Quite right, most BTL landlords are actually a bit in denial about their actual return. I’ve never seen a decent analysis of property investment that included the real costs like having to decorate on a quite frequent basis and upgrade kitchens/bathrooms to modern standards every 10-15 years. No one ever accounts for their time managing property either.

  17. Matt – £1500 a year? I’ve lived in this house for 13 years, probably spent around £1500 in 13 years on what you suggest is annual.
    Not a tiny house, 3 bed semi that was ex-council in the 80s.

  18. Martin:

    Wait till you find you need a few windows replaced and the place redecorated and that’s £15,000 straight off.

    That’s how you get the £1500 pa. It’s an annualised figure from lumpy sums.

  19. Suspect JamesV has never been a landlord or a tenant under Shorthold.

    What happens in reality is that good tenants can stay for as long as they like with no significant rent increases because a good tenant who doesn’t trash the place or break the boiler every year is worth their weigh in gold.

    Likewise if the landlord is awful the tenants aren’t stuck with him for years.

    The challenge comes with uncivilised tenants and uncivilised landlords. There’s very little legislation can do to make people behave better.

  20. Maintenance – I’ve lived in my current place for 12 years. It wasn’t, previously, as well maintained as a council house would have been.

    In that time, we’ve painted most of the place, had three rooms completely redecorated, put a new carpet in the other and replaced 3 windows. We also had to have the roof redone but that’s a 1-in-a-100-year thing (but £200pa of Matt W’s £1500 on its own.)

    If I was going to rent out, it would definitely need a new kitchen (next on our plan anyway) and probably need completely rewired.

  21. @Martin

    I stand by my £1500 extra per annum cost, when you add up all the extra costs covered by a rent that are not in a mortgage. Try a fuller list.

    (I’m ignoring that wear and tear in a tenanted property is higher anyway, that there are paperwork costs, and that there are extra regulatory costs that an owner doesn’t have to bear.)

    Can you put approx numbers to these for your house?

    Annual

    Insurance
    Maintenance to the fabric.

    Occasional

    Call outs for tradesmen at perhaps £50-100 a time.

    Periodic (you choose how often).

    Double glazing windows and doors.
    New Bathroom (£3k every 10-15 years?).
    New Kitchen (£4k every 10-12 years?).
    Carpets every few years (£10 per sqm when – for LLs it is once per 7 years or more).
    Redecoration.
    Central heating.
    Rewiring and upgrade of electrics.
    Fences.
    Energy related upgrades – insulation and so on.

    And all the other little bits and pieces that happen all the time – broken windows, petty water leaks.

    There’s no end of it.

    In Germany by comparison Tenants are often responsible for installing kitchens.

  22. As an anecdote, our surveyor for our house stated than any buyer would need to budget £5-10k a year for maintenance for ever.

    This is a 5000 sqft 16-19th century effort that is Grade II Listed.

    If you don’t you end up having a house gradually deteriorating and losing value compared to other, and shell out 20 times as much once a generation.

  23. JamesV: I’m renting and I’m not on such a contract. The real estate agents who manage the property every now and then try to put us on one, but both us and the landlord nix the idea.

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