Stabilising London's Private Sector Rents

Page 1

Stabilising London’s Private Sector Rents 14 May 2015

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Stabilising London’s Private Sector Rents

Welcome Jo Wilson

Head of Policy, Future of London

Agenda 08.30

Arrivals, coffee/tea

09.00

Welcome & chair’s introduction: Jo Wilson

09.05

Overview of rent stabilisation: John Bibby, Policy Officer, Shelter

09.20 The international perspective – practical lessons for London: Professor Christine Whitehead OBE, LSE 09.35 Economic realities - the effect of rent stabilisation on the PRS housing market: Nigel Minto, Head of Housing Strategy and Policy, LB Hackney 09.50

Open to the floor/broader discussion

10.25

Chair’s summing up & close

10.30

Coffee & networking

11.00

Close

Stabilising London’s Private Sector Rents John Bibby

Policy Officer, Shelter

Until there’s a home for everyone Rent stabilisation overview John Bibby e:john_bibby@shelter.org.uk

Thursday, 14 May 5

1. The problem

6

Rental affordability in London Comparison net earnings (not including benefit payments) for a median full-time earner to a median rent by borough. Source: VOA and ONS ASHE figures

Proportion of take home pay used for rent

7

Consequences  Families in rented homes going to extreme lengths to afford rent payments  Lack of affordable properties available for new entrants  The continuing growth of the (under pressure) housing benefit bill  Growth of homelessness as a result of the end of an AST?

8

How bad is it? How much higher are median rents than they would need to be for them to be affordable for a person on a median income? Source: VOA and ONS ASHE figures

Multiple that rents are above what would be an affordable rent

9

The hardest, simplest solution out there? The radical rent cap. A 38 Degrees petition proposes a maximum of ÂŁ120 a week for a one bed flat in London. It has almost 70,000 signatures. Source: VOA and ONS ASHE figures

Multiple that rents are above the rent implied by the proposed cap

10

Possible consequences  Widespread sale of rented property (if not prevented) & potential impact on wider market  Absence of investment in new property  Absence of investment in maintenance and upkeep of existing property  Growth of informal economy  (Regulated rents at an affordable level)

11

2. Options for regulating rents

12

Building a rent regulatory regime      

13

Initial rent setting Rent increases during a tenancy Length of a lease Capacity to get a property back during lease Capacity to sell/transfer to other tenure Enforcement or eviction if contract broken

Historic regimes

14

Rent freeze (England during WW1 and WW2)

Emergency measure. Chargeable rents limited to their current levels. Opportunity to leave sector limited (variously).

Fair rent regime (England for all tenancies 19771989)

Indefinite tenancies; chargeable rent limited by the amount assessed as a fair rent for a similar property in the same area.

What is rent stabilisation? General principles:  Some limit on rent increases within tenancy - At the moment, while some legal restrictions exist, practically no limit

 Some more solid security of tenure - At the moment, minimum tenancy length for an AST is 6 months

 Limit on amount that can be increased between tenancies? - Currently no limit

15

‘Rent stabilisation’ proposals Shelter’s Stable Rental Contract

Civitas

16

Five year tenancies; Rent rises limited to inflation in contract; Rent set by market at contract start.

Indefinite tenancies; Rent rises limited to inflation or wages in contract; Rent set by the market at contract start.

(Current) Three year tenancies; Labour Rent rises limited to Party policy inflation in contract; Rent set by market at contract start. David Lammy MP’s proposal

Three year tenancies; Rent rises limited to 20% increase over three years; Rent limited to 20% above market rate at contract start.

What does it do about the affordability problem?

    17

Day after introduction: no change No forced rent cut No maximum chargeable rent Greater certainty

Does it stop it getting worse? 6 5 4 3 2 1 Ja n 2 0

Se p

Ma y

4

3

2

1

15

1 Jan 2 0

Se p

Ma y

1 Ja n 20

Sep

Ma y

1 Ja n 20

Sep

Ma y

1 Jan 2 0

Se p

0 -1

Rent change London

Source: ONS

CPI change (UK)

 Depends on specifics (tenancy term and limit/indexation of rent uplift)  How often will the market reset? And will the landlord build in rent increases? 18

3. The ‘other problem’

19

Security in home

Length of time living in current homeHow important is being able to live somewhere long term (5 years) t 6 0%

70 60 50 40 30 20 10

4 0% 2 0% 0%

0

now Do n't k

o rta n t

Source: Shelter tenants’ survey

a ll im p

>10 years

No t a t

t

an t im port

p o rtan

ortan t

2-10 years

No t ve ry

Fairly im

p Very im

rs

20

re s

re nters

re nters

occu p ie

Source: ONS

a ll te n u

s ocial

pri va te

o wn er

<2 years

A mainstream tenure 10 9

million households

8 7 6 5 4 3 2 1 0

1980

1984

1988

own outright social renters

21

1992

1996

2000

2004

buying with mortgage

2008

2011-12

private renters

Households with children 50 45 40 35 30 percentage 25 20 15 10 5 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

own outright private renters

buying with mortgage social renters

1.5 million households with dependent children now live in the private rented sector 22

What is rent stabilisation, again? General principles:  Some limit on rent increases within tenancy - At the moment, while some legal restrictions exist, practically no limit

 Some more solid security of tenure - At the moment, minimum tenancy length for an AST is 6 months

 Limit on amount that can be increased between tenancies? - Currently no limit

23

4. Recap

24

Overview of rent stabilisation  London has a genuine problem with high rents  But regulating to cap rents at an affordable level is problematic  There are ways to stabilise rents and make them more predictable  They have less of an impact on rent affordability  But they have other benefits – in fact these are the main argument for their introduction

25

Until there’s a home for everyone Thank you John Bibby e:john_bibby@shelter.org.uk

Thursday, 14 May 26

Stabilising London’s Private Sector Rents Christine Whitehead OBE Professor of Housing, LSE

The international perspective – practical lessons for London Christine Whitehead London School of Economics

Stabilising London’s Private Sector Rents: a viable option for tackling the affordability gap? Future of London, May 14th

Background • Private rented sectors growing in many European countries, in part as a result of the credit crunch but also longer term trends among younger households – and declines in social sectors • Changing demographics of the PRS • Increasing market pressures in capitals and some other metropolitan areas • Pressures growing for increased regulation – whatever current levels of regulation.

The evolution of rent regulation First generation Control of rent levels (‘rent freezes’). Incentives for landlords to leave the sector and under-maintain remaining properties. Second generation Control of rent increases within and between tenancies. Still generates disinvestment when rises below market. Third generation Control of rent increases based on defined index within tenancies, but not for new tenancies. Most market-friendly.

Path of rents under third-generation controls

International experience: Rent regulation Country

on first renting

Switzerland

Rent regulation on new of rent rises on tenant existing leases

Y

Y

Y

Sometimes

Sometimes

Y

Most

Most

Y

Spain

N

Y

Y

Belgium

N

N

Y

Finland

N

N

Y

France

N

N

Y

Norway

N

N

Y

Germany Netherlands

Sweden

Rents based on rents for similar units owned by MHCs

Australia

N

N

N

USA*

N

N

N

N**

N

N

England

International experience: Leases Typical lease period

Security beyond lease period

Germany

Indefinite

High

Sweden

Indefinite

High

Switzerland

Indefinite

High

Netherlands

Indefinite

High

5 years

Low

Norway

3 years or indefinite

Low

France

3 years

Medium

Belgium

1-3 years

Low

Finland

One year

Medium

1 year

Low

Australia

6 months

Low

England

1 year

Low

Country

Spain

USA

The German example Terms and conditions of renting • Tenants get indefinite leases • Landlords can evict only for reasons set out in the law; notice period 3 – 9 months depending on how long tenancy has lasted • If the landlord sells, the lease binds the new owner • Initial rent can be freely set, but not more than 20-50% above average rents in the local area • Rent can go up every 15 months by average in the area

The German example The rental offer

• Most PRS units are in rental-only blocks in single ownership • Tenants stay for long time (average 11 years) • Landlords invest into the longer term • Landlords provide minimal facilities beyond the dwelling itself: usually no furniture or kitchens • Thus a very different model with different property rights

The German example Economic environment

• Over most of last thirty years real house prices fell in most areas • General inflation also very low so costs fairly predictable, though some problems as standards have risen eg re energy efficiency • Some areas where pressures on rental market and difficulties in finding accommodation - extending to more cities since 2008 • Owner-occupation and house prices in these areas now rising quite rapidly

Germany: rent regulation changes • 2011: capping limit of annual rent increase from 20% to 15% within three years • 2015: rent cannot be raised more than 15% within four years; maximum 11% of increase after modernisation reduced to 10% • Mid-2015 rent brake: initial rent cannot exceed 10% of local reference rent • New rent cap and new limit of rent increase are imposed in Berlin, Hamburg and many cities in Bavaria; about 4 millions rental dwellings

The Netherlands • Rent control on initial rent based on points system; controlled maximum rent increases related to these points: determined by the Parliament, cover both private and social renting • Since 2010, government has started to shift the Dutch housing system to ‘more market’ and aimed to reduce the size of the social rental sector move towards families in need • 2013: higher rent for higher income households both in private and social rental sectors • April 2014: proposed a rent freeze on the regulated rental sectors for a three year period which will start in 2016; in part aiming to shift more low-quality rental units further up-market

France •

Rent increases within lease period controlled; standard lease 1 to 3 years

•

2012: rent control limited the rate of increase within tenancy in several cities

•

ALUR Act enforced in March 2014: new rules on initial rents in a few high pressure areas; initial rents must refer to an “observatory of rents” and limited to 20% per m2 above the local median rent

•

But in September 2014: withdrew plans to impose controls on private rent fearing that rent control will deter investment

•

Rent control only introduced experimentally in Paris

•

But also guarantees for landlords re non-payments proposed

Other international experience Ireland Rents largely decontrolled in 1982; can be changed only once/year, and cannot exceed market. Tenancies last 4 years. Rents rising. Proposals to link rent increases to CPI and other forms of control under discussion NYC Rent stabilisation applies to about 50% of PRS. City Hall sets allowable % rent increases, mandatory lease renewals. Stabilised rents well below market in Manhattan; differences smaller in other boroughs. Higher-rent units can be brought out of regulation under ‘luxury decontrol’. Tenants stay longer but are mainly middle income. San Francisco Initial rents freely set; rent increases on apartments (but not houses) set by rent board—generally less than 2% p.a. Landlords selling to developers.

London: Interviews suggest • Some landlords with longer time horizons value income certainty – and not just institutions and Housing Associations. • Some tenants want longer tenancies and transparent rent rises; more would clearly benefit if these were more readily available. • However there are many landlords and tenants who are not interested, and • Landlords want stability – and in a low-regulation environment they worry that increased regulation will be the first step to stronger controls.

What can we learn? •

Regulation not always good for tenants/bad for landlords: – Can address market failures for both tenants and landlords, while reducing risks for both – Can give landlords more consistent rent rises, reducing financing costs, but tenants may pay for certainty – Or can restrict returns to landlords leading to reductions in supply and making access more difficult for tenants – Depends on the detail and the institutional and market environment

•

Rent stabilisation is only one part of the story

•

Stabilisation does not benefit either all landlords or all tenants

•

Certainty about the regulatory framework is particularly important to landlords and financiers

•

International comparisons simply do not start from same starting point – major problems of perception

Contact c.m.e.whitehead@lse.ac.uk References This presentation is based on a number of pieces of research undertaken by LSE London - see http://www.lse.ac.uk/geographyAndEnvironment/research/london/Hom e.aspx It draws in particular on: Scanlon, K. and Whitehead, C.M.E Rent Stabilisation: Principles and International Experience. August 2014 http://www.lse.ac.uk/geographyAndEnvironment/research/london/pdf/ Rent-Stabilisation-report-2014.pdf

Stabilising London’s Private Sector Rents Nigel Minto

Head of Housing Strategy and Policy, LB Hackney

Economic realities: The effect of rent stabilisation on the PRS Future of London Thursday 14th May 2015 Nigel Minto. Head of Housing Strategy & Policy. LB Hackney

Contents

1. 2. 3. 4. 5.

Terms and context Differing views on rent stabilisation Different outcomes 10 steps to a better PRS Questions

What is rent stabilisation trying to achieve? • Inject greater security of tenure and stability into the PRS • Greater transparency and honesty into the process: • Mitigate growth in the HB budget • Maintain and improve conditions and standards in the PRS • Increase PRS new supply

• Create the environment for, and complement: • The establishment and promotion of a stable regulatory regime • Reduce churn in the sector

How could it work ? • Higher initial rents • Longer-term tenancies • Index-linked rent increase over a 3- to 5-year tenancy period • Individual London borough or London-wide

Variations on the rent stabilisation model • • • • •

All rents stabilised (existing & new build) Rents in some boroughs stabilised Only existing or new PRS rents stabilised Some bed size rents stabilised Rents stabilised when PRS reaches certain % of market rents • Specific types of property rents stabilised

What do landlords want from letting a property? • • • • • • • •

Long-term capital appreciation Steady and predictable upward yield income Minimal void turn around time periods Minimal management costs Maximise savings Safeguard property investment Uplift in property values ‘Good’ tenants

Arguments against rent stabilisation Stabilisation could: • • • • • • • •

artificially restrict and reduce ‘real’ rent levels reduce tenant mobility - no incentive to move deter new landlords from entering the market make existing PRS landlords leave the market cause a decline in overall supply of PRS in London create a ripple effect depressing house values reduce funding available for buy to lets reduce overall market efficiency

Arguments against rent stabilisation Stabilisation could: • lead to a reduction in the overall reduction of current and new investment in the PRS • lead to a reduction in the quality of PRS stock • perversely lead to an increase in the cost of renting • make landlords less inclined to invest in stock and undertake repairs • not provide an investment incentive for landlords • increase the level of unmet PRS demand • be difficult to abolish once implemented

Arguments in favour of rent stabilisation • Stabilisation could: • provide certainty for tenants, particularly older tenants • provide investment and income certainty for landlords • stabilise the housing benefit budget and provide some predictability • lead to longer tenancies and more settled communities • act as an incentive for institutional investors to invest in the market • allow some conditionality for HB

10 steps to better private renting for tenants and landlords

Rent stabilisation Security of tenure Improve standards Drive improvements in the sector

A long-term London housing investment strategy ? • Need to move away from PRS (and housing) short termism • Develop PRS product into an stable aspirational destination • Rent stabilisation must not be taken forward completely in isolation – it has to be part of a wider PRS ‘offer’ • There is a need to modernise & join up 50 Acts of Parliament and 70 pieces of delegated legislation

Questions?

Stabilising London’s Private Sector Rents

Discussion / Q&A

Thank you! Future of London www.futureoflondon.org.uk @ futureofldn Future of London

Stabilising London’s Private Sector Rents 14 May 2015

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