Patrick Mooney looks at warning signs coming from the private rented sector

Of course this could just be a piece of pre-Budget hyperbole, but leading representatives of private landlords are warning the Chancellor that Government policies are driving their members out of the market – potentially leading to a shortfall of half a million rental properties.

Since the days of George Osborne as Chancellor, landlords have been complaining that his actions to tackle the huge growth in buy-to-lets would lead to a massive drop in the availability of rentals. Now it is possible those warnings could be about to turn into reality.

One of Osborne’s main taxation changes (limiting mortgage interest relief to the basic rate) is due to take effect from this coming April. Two organisations are warning this will make many landlords significantly worse off or even unable to make a profit on any of their lettings.

Level playing fields

They say because the forthcoming change does not apply to landlords with short-term lets (such as those advertised on Airbnb and similar sites) it will encourage a lot of long-term landlords to move into that market. To counter this they want to see such tax advantages removed.

Allied to this, they also want to see a level regulatory playing field between short-term and long-term lets specifically over protections for tenants and health and safety requirements.

The Residential Landlords Association and the National Landlords Association have now combined forces to present a joint submission ahead of this month’s Budget.

In it they alert the Government to some worrying signs about their members’ intentions to reduce their stock. They are also proposing some practical changes that could improve the living conditions for their tenants and which I will return to a little later!

Growing numbers voting with their feet

The RLA report that 34 per cent of landlords are planning to sell property over the next year while the NLA suggest that 24 per cent of landlords are looking to reduce the number of properties they let in the next year. These are both very sizeable increases on three years ago.

In addition the proportion of landlords who are looking to reduce the number of properties in their portfolio increases substantially with the number of properties they own.

Almost four in ten landlords with more than ten properties are looking to sell some of their stock. This suggests the Government’s interventions are discouraging portfolio landlords (those running larger, full-time lettings businesses) rather than ‘accidental’ landlords who continue to remain in the market.

Recently published research showed that almost 50,000 properties have already been made unavailable to long-term tenants in order for landlords to pursue short-term lets, principally in tourism hotspots as citybreaks grow in popularity.

The RLA and NLA are warning this figure could rise by upto another 470,000 properties (almost 10 per cent of the country’s private rental stock) if landlords deliver on their ‘very likely’ or ‘fairly likely’ intentions to join them in the short-term letting business.

Big rent increases on the cards

With landlords selling more properties than they are buying and others switching to short-term holiday lets for tax reasons, unless effective action is taken quickly, then tenants are going to find it increasingly difficult to find the housing they want, and rents will inevitably rise.

The only question being, by how much will rents rise? Most estimates start at about 10 per cent, but there are many that forecast at least double that rate.

To combat this Ministers are being urged to consider introducing limits on short term letting activities in areas where is a demonstrable impact on the supply of private rented housing.

Counter-productive

They also want the Government to identify ways to improve enforcement action where commercial landlords are not complying with local planning laws or the 90 day limit for short-term lets in London.

David Smith, Policy Director for the Residential landlords Association, said:

“Government policy is actively encouraging the growth of holiday homes at the expense of long-term homes to rent which many families need. This is completely counterproductive, making renting more expensive and undermining efforts to help tenants save for a house of their own.

“The Chancellor must use his Budget to give tenants a better deal by supporting good landlords to provide the homes to rent that they want to live in.”

Possible improvements

Articles previously written by me for this website have often cited the older average age of private rental properties in this country, along with them being less energy efficient, but also the prevalence of damp and draughty conditions.

The Government has been taking action to encourage landlords to improve the insulation and weather tightness of their properties. The rate of improvement in property conditions has recently slowed and we are at risk of hitting a plateau.

So it is particularly welcome to see the RLA and NLA proposing actions in their pre-Budget submission that could make a real difference and kickstart a round of positive change in property conditions.

Tax breaks

They are suggesting that any work a landlord carries out to a rental property that is recommended on an Energy Performance Certificate (EPC) should be tax deductible, with landlords able to choose whether to deduct against income tax or capital gains tax.

This would have the benefit of producing a series of win wins – for tenants, for landlords, for contractors and for Government policies in moving us towards a net zero carbon emissions economy.

It will encourage landlords to behave in a way that many would otherwise not have done.

Research by the RLA has found that 42 per cent of landlords are not planning to make any investment in energy efficiency measures over the next 12-24 months. But most of them (72 per cent) said that a tax scheme to support such work would make a difference to their decision.

Positive benefits

Implementing change in this way would make it self-policing as the recommendations are legally required to be listed on the EPC and are made by a qualified energy performance assessor.

They also have a directly measurable cost-benefit as each recommendation must come with an estimate of its cost and the expected annual monetary saving it will create.

This will incentivise improvements over the long term rather than being a ‘one-off’ as a landlord can get a new EPC having improved the property and carry out a further set of improvements to increase efficiency, thus permitting a further tax deduction. It’s very much a virtuous circle, facilitated by taxation.

It also encourages improvement beyond landlords simply reaching the minimum E standard and then stopping. This could have a dramatic impact on the comfort of current and future residents living in the properties.

Incentives that work

Encouraging landlords to undertake continual improvements to a property should provide more new work for local tradespeople that landlords most often use. Research by Aldermore Bank suggests that private landlords currently contribute £3.61bn into local businesses across the UK every year

Another helpful suggestion could benefit the growing number of private sector tenants with a physical disability. In order to facilitate more use of Disabled Facilities Grants (DFGs) in the sector, the Government should loosen the requirement that DFGs can only be awarded if there is proof that there is an intention to live in the house for five years.

The Government could also intervene to incentivise landlords to adapt properties and to continue to offer these to the market over the long term.

Using capital gains tax relief for landlords who let properties to tenants in need of adaptations or accessible homes for a period of at least five consecutive years would support landlords to let to disabled and older tenants, promoting both longer tenancies and the retention of adaptations once installed.

Final word

Back to David Smith, policy director at the RLA, for some final words: “The tax system for rented housing is failing. It deters investment in new housing and provides no support to those wanting to make energy efficiency improvements.

“For the sake of those living in rented housing or who are looking for accommodation, Ministers need to use the Budget to urgently change course and work with good landlords to ensure the provision of good, long term, affordable housing.”

If the new Chancellor was to reject George Osborne’s policies and adopt at least some of those proposed by the RLA and NLA, we could see a real shift in momentum towards retaining more properties for rent and adapted in ways to future proof them for our needs.

Patrick Mooney is news editor of Housing Management & Maintenance magazine