The plight of tenants has been exacerbated by heavy-handed government actions that have prompted many private landlords to exit the market without offering enough public sector alternatives to make up the difference. No wonder the UK is struggling to house Ukrainian refugees. Demand is overwhelming from a long-term structural lack of supply.
The problem in the private rental sector is twofold: strict planning restrictions have limited the construction of new homes and most of them are for owner-occupiers rather than tenants. At the same time, the existing supply of rental accommodation has shrunk as landlords leave the sector, under pressure from increased taxation and regulation.
Costs for owners have increased significantly since 2016. Small owners are now unable to offset all of their interest charges against the profits they make, unlike large owners who operate like limited liability companies. Owners also pay an additional stamp duty surcharge of 3% (a purchase tax) on new acquisitions. And if they sell, they pay capital gains tax, but at a rate 10 percentage points higher than any other asset.
The regulatory burden is also significant. Local authorities, themselves facing a funding crisis, have increasingly turned to rental licensing systems to generate additional revenue. In a typical London borough, a license will cost between 700 pounds ($920) and 5,000 pounds per property.
It has also become more difficult to evict tenants. This was necessary during the pandemic, but for many landlords the costs of not being able to evict unruly and insolvent tenants have been prohibitive.
Also, in 2028, it will become illegal to rent a property with an energy efficiency rating below C on the government’s Energy Performance Certificates (EPC) scale. It’s a laudable goal, but the cost of insulation upgrades alone is expected to be around £8,900 per property. Other measures aimed at prohibiting the installation of gas boilers in favor of heat pumps, which can operate from 6,000 to 18,000 pounds, will meanwhile increase the bill for owners. And the way energy efficiency is calculated, there is no guarantee that either change will sufficiently improve a property’s EPC rating.
While many of these measures are popular with tenants and the general public, they have had a rather predictable impact on the supply and cost of renting a property.
Initially, the closures had a depressive effect on rental levels. Rents in London fell by 7% between March and December 2020, due to the mass exodus from the capital in search of more living space. Since then, however, there has been a surge in demand and rents in London have risen by almost 20%.
A phalanx of young workers who were on furlough or living with their parents are now being urged back into the office. They need decent housing in relative proximity to their work. But the London rental market they return to is a very different place. Securing a rental takes a lot more effort now, including not just proof of deposit, but income security, often including a guarantor and a multi-year rental agreement.
Rising rents go hand in hand with soaring real estate prices. But failure to secure your dream home is one thing; not having decent housing is another. This is the height of the cost of living crisis in Britain.
And it’s not just in big cities like London. The most extreme imbalances are in areas like the North West of England, the Midlands and Wales, which are also where house prices have risen the fastest – up to 15% Last year. The average age of a first-time home buyer has risen to 34, a six-year gain since 2007. This is not surprising given that house prices have gone from average to long term from four times wages nationwide to eight times, and as much as 13 times in London.
Things are bound to get worse before they get better. The government estimates that 1.8 million additional new households will be created over the next 10 years. This means private rental sector supply will need to increase by 227,000 units a year to meet government targets, according to Capital Economics, an independent macroeconomic research consultancy. Yet residential investment accounts for just 4% of UK gross domestic product, one of the lowest percentages in the G20.
A silver lining perhaps: While any rent increases are unwelcome, rents have fallen as a percentage of median income since 2017. On that basis, they are the most affordable since 2005. The latest squeeze, however, threatens to reverse the trend. .
It seems that even though people don’t like private landlords, they are beginning to discover that the alternative is worse. The government had better think seriously about solutions before this crisis upsets its prized “race to the top” ambitions.
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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in banking, most recently as Chief Market Strategist at Haitong Securities in London.
Stuart Trow is an investment strategist, most recently at the European Bank for Reconstruction and Development. He is a financial coach, co-host of “Money, Money, Money” on Switch Radio and author of “The Bluffer’s Guide to Economics”.
More stories like this are available at bloomberg.com/opinion