The UKs Private Rented Sector - Essay Example

To what extent is increased legal regulation of the privately rented sector justified and desirable? s Submitted by s: Introduction UK’s private rented sector continues to develop as a proportion of its housing stock with more and more people have to depend on it as the prices of houses increase and social housing experiences declines1. It has been a forecast that the private rented sector will form more than a third of the housing stock of the UK by 20322. The cost of private renting is no longer proportional to wages and this implies it has become increasingly costly for tenants and through the housing benefit bill supposed to subsidize rents for households on lower incomes, the general taxpayer. Additionally, housing benefits have an inflationary impact on the levels of rent especially at the lower end of the market thereby worsening the situation3. In some of the sub-markets characterized by a high number of claimants, the impact of this is acute with the landlords being able to set rents at levels that are artificially high to match the Local Housing Allowance4. Furthermore, the security of tenure availed by private property owners, of between six and twelve months is not sufficient for some families particularly because the landlords have control of these regulations hence can make adjustments relative to their own interests5. UK’s private rented sector The private rented sector has gone through extraordinary revitalization through the past twenty years to become increasingly critical to considerations concerned with the housing markets as well as the benefit system6. Currently, there are approximately over four million houses in England privately rented and these accounts for about 18% of all the family units7. The industry has also doubled in magnitude since 1989 while having more households presently compared to social housing while occupation by owners is on the decline8. Following this is the quick increase in the housing benefit bill that has increased exponentially in regards to real terms through a similar period reaching an excess of twenty four billion pounds in the UK. Consequently, the amount claimed by tenants from private property owners has also increased and doubled through the past ten years to almost ten billion pounds. These figures demonstrate the deteriorating affordability of private rented housing that an increasing number of people are forced to use as a consequence of the drop in social housing along with challenges to house ownership9. Along with the costs of renting, an additional challenge that has emerged with the growing dependence on private property owners includes the nonexistence of security provided to renters who seek long-term steadiness, especially the people who have children. All the solutions to the present-day housing catastrophe have to entail a considerable upsurge in the erection of new houses along with the social industry, but this does not imply no action apply to lessen the related issues until when scarcity will cease being a defining aspect of the home markets. Furthermore, in London, it remains conceivable supply will never be equal to demand being the space limitation and apparently boundless appeal of the capital to newcomers as well as investors from all over the globe. Reforms and the underlying problem There have been a number of endeavours to reform housing benefit in an attempt to maintain the costs at a low level while ironing out any anomalies10. However, proposals such as introducing a national register for landlords and the intervention of the government, particularly the private rented sector is yet to occur. The Law Commission started working on issues such as the insecurity in 2001 but there still lacks any utter solutions11. While being mindful of the bloating costs, The Coalition sought to deal with the issue with reforms that have entailed moving Local Housing Allowance rates down from the median rent in a specific area all the way to the thirteenth percentile as well as placing national caps on various classes of properties. An additional change has been capping the uprating of LHA levels at only 1% every year; initially there was an every month revision in relations to movements in the levels of rent in the private sector. Theoretically, this is supposed to keep any increase in LHA below the rise in levels of rent thus placing some form of downward pressure on the rents even though there are exemptions for the areas characterized by the highest increases in rent12. Nonetheless, this will not stop more people from developing a reliance on housing benefits as rents continue to increase. With increased reliance on housing benefit as a safety net, it has become impossible to get rid of it without the creation of huge disruptions and social confusion. Initially, some people spoke against a scheme that supposedly assisted the poor to pay their rent and warning housing benefit would result in increased rents to levels the working population would not be able to afford and the system would become fraudulent viewing them as irrelevant. By the time, the imperfections attracted vast attention i.e. increasing rents, out of control housing bills and rampant corruption the government had limited ideas on how it could be able to control the monster it had initially created. This continues to be the case presently and thus requires identification and implementation of solutions for holding down costs. Rent regulation The regulation of rent has been more and more on the agenda in the recent past since the costs of housing has continued to increase while income also decreased after the recession13. The UK has previously faced rent regulation when controls were put in place between 1905 and 1989 and in the same period, there was considerable decrease in the size of the private rented industry14. The abolishment of rent control and establishment of short-hold tenancy marked a rejuvenation of the private rented sector. It is not easy to deny that having prices lower than those of property owners would charge can make the sector become less desirable for those willing to invest in it. In the same manner, it is easy to observe how eliminating these controls and allowing property owners to take back possession of their property made it more desirable for potential investors. However, these adjustments to the tenure legislations did not occur in a vacuum and there is a risk of ignoring other significant aspects that have also had a considerable effect on the evolution of the sector through the past century. Instigated rent controls in the United Kingdom varied from a straightforward freeze during the world wars to fair rents regimes in the sixties aimed at removing the impact of scarcity in the rental market15. The initial step was an increase of Rent and Mortgage Interest Act of 1915 limiting rents for unfurnished homes (for the working class) to specific levels at the beginning of the war in 191416. This went through amendments soon after in order to restrict the ability of proprietors to take back the property and use it for different purposes. The aim was a temporary measure supposed to expire six months after the war ended but extended into the subsequent years while covering almost all the properties by 1920 as a response to the shortage in housing that followed WW1. Nonetheless, rents applied to increase a particular proportion of their 1914 levels and regulations did not cover new dwellings. The legislation was popular with the tenants as well as the landlords since their mortgage interest remained low. When the Conservative government was planning to phase out the regulations in the twenties, they were unable to overcome the rise in public opposition to this attempt17. There was a reintroduction of security of tenure as well as fair rents through the 1965 Rent Act that established a rent system sought to allow the market rates to be agreed upon between landlords and their tenants18. In the event that either party did not feel set rent was fair, they were at liberty to seek the adjudication of a rent officer. New private tenancies regulations became irrelevant through the Housing Act of 1988; however, a smaller number of tenancies under the initial regulation remained in cases where the tenants had not moved their homes since the eighties19. The regulated tenants continue to have fair rents on the properties determined by rent officers from autonomous Valuation Office Agency. In the determination of fair rent, officers should make calculations of the rent to be paid in the event when the provision of similar homes was not scarce. This has resulted in a series of legal battles since the nineties such as the 2012 Alex Mullins VS Eastleigh Borough Council case and for the first time, fair rents could liken to examples of market rents in the same area or the same block20. Salient characteristics of the privately rented sector The law that embodies the obligations on landlords and tenants is disjointed and turgid while originating from contract, statute and common law with the provisions relevant to issues such as the duties of the tenants missing from the housing law. Moreover, not all the landlords are aware of the obligations placed upon them by the regulation or the common law hence lack appreciation for their nature and assume them through their contracts. On the part of the tenants, most of them are not aware of the contents of their tenancy agreements and have little likelihood of understanding the implied obligations on themselves and their landlords. They are not in a position to understand if the included terms in the tenancy agreements signed adhere to the law. The costs the landlords or their tenants incur as they seek to enforce their rights as well as the obligations of the other party can be high21. There has been a decrease in court proceedings dealing with issues of apparent harassment until long after the assured shorthand tenancy. On the other hand, the available solutions may not result in outcomes sought, as the desired results may be those not favoured by the other party from specific behaviours- not they should undergo punishment. Based in these aspects and others, the law plays a comparatively small part in regulating majority of the relationships between landlords and tenants22. Comparatively few tenants pursue actions against their landlords and the ones following this path often do not follow the entire process to its conclusion, as it is simpler to deal with the issue through moving to a different tenancy. In case alternative tenancies are scarce, it may be simpler to endure the inconvenience of despair and the landlords may have the temptation of using unlawful approaches because of frustrations with delays related to adhering to the prescribed processes. If it is assumed in the present circumstances, neither the solutions provided by law nor the market forces have likelihood of sufficiently enforcing obligations, attributes of the private rented sector act as a hindrance for any interventions or regulations from the government. When there is no comprehensive and compulsory registration system knowing who should be subjected to regulations becomes challenging and acute especially in the resident landlord sector where landlordism is occasional instead of a continuous activity. Even though there are good reasons of thinking that the private rented sector has compliance issues, the data available is not sufficient to confirm this. It is clear that despair is more common in the private rented sector compared to other areas and there are considerable issues associated with the apparent unjustified withholding of tenant’s deposits by their landlords23. There have been reports most of the tenants state their associations with the landlords are not positive and it is often as a consequence of failure to conduct repairs completely or within practical timeframes24. However, interpreting these figures as essentially implying a breach of legal obligations needs some form of a leap of faith. Conversely, limited cases of unlawful eviction proceed as prosecutions by courts of law but assuming unlawful eviction is not an issue would be ignoring the complicated factors through which the process of breach of obligations becomes judicial decision25. For instance, in the 2009 Anslow v. Hayes case in Manchester, the tenant had some arrears and Hayes the property owner restricted him from entering his room. Despite, the tenant having his fouls the judge order for the landlord to pay him over £10,000 as compensation for the damages. The basis of the summary judgement depicts the how crucial the issue continues to become over the years. In a similar manner, the absence of disputes between the tenant and the landlord cannot be assumed to indicate all the legal obligations have been taken care of. It is the attributes of this sector that imply the issues of compliance may be expected while also meaning the problematic circumstances faced by the landlords or tenants are not likely to be seen in statistical records. Growth of the regulation burden Even with acknowledgment of the market processes’ significance as far as the private rented sector is concerned, the regulatory burden continues to grow26. Court rulings have developed precedents to apply in the future and this has given additional layers to the regulatory creep. For instance, the eviction laws state tenants can only leave their homes because of a court order or when sharing accommodation with the property owner i.e. kitchen, bathroom. This regulation has not been prevalent for long but the court makes no exceptions. A relevant example is the 2010 Keddey v. Hughes case in Sheffield where the tenant agreed to move out on October the same year but could not manage due to financial struggles. Hughes, the property owner, consistently assaulted Keddey forcing him to vacate by packing his furniture and other belongings. The judge in Sheffield County Court ruled against Hughes commanding him to pay Keddey £9870 as compensation for the damages. There is an increasing appreciation in policy circles of the considerable degree of costs of operation in the private rented sector with estimates varying from 30% to 40% of the gross rents27. Nonetheless, at present, there are no moves to assess the effect of the regulations on them and decreasing the costs of operation through re-assessing the costs and benefits of characteristics of the present regulations and their effect on property owners’ cost of operation may encourage investment as well as lower rents. However, stricter regulations could work in the opposite manner through increasing the costs of stifling incentives. Regulations have to deal with the basic issue of identifying inappropriate behaviour and practices and this makes it difficult for regulatory agencies to point out exactly where it occurs, to enforce penalties as well as track them28. In these circumstances, there is high likelihood cost effectiveness will be poor while the concerns of the landlords about the rising tide of regulations continue to increase. Research has demonstrated landlords have a will to support regulations may address the issue of the reputation of the private rented sector being damaged by some of the landlords with poor or crooked conduct. The private rented sector of the United Kingdom considered as market led had the first legislation enacted almost twenty-five years ago after a long period of strict and complicated controls. Nonetheless, there is a huge variety of legally binding regulations in existence such as the requirement for landlords to confirm the immigration status of all their tenants or from the governments ‘Review of Conditions in Private Rented Sector’ where the use of selective licencing is prevalent29. These are not mere historic leftovers or obligatory requirements for an operational environment but cautious efforts by the successive administrations to regulate the conduct of property owners as well as their agents such as the proposal of selective licencing for the landlords or the banning of letting agent’s fees for tenants30. They are all standard regulations that would work to counter some of the issues but there still lacks a comprehensive solution. In addition, the tide of regulation has been growing in the recent past with pressure for more mounting. Appreciably, the legal processes are the main drivers of this achievement and maintaining a free market is important to sustaining investments as well as a competitive environment. Therefore, there is no superficial agenda seeking to reduce private renting to a tiny rump in a manner that was obviously the case in some political situations characterizing the 20th century31. Rather, some might argue there has been failure to acknowledge the cumulative effects of regulation on the cost of making rental housing available. Reinforcing regulatory creep demonstrates a lacking in over-riding vision of the way of letting the private rental sector process gain the desired housing ends32. However, initiatives such as the Labour’s Local and European Election are forming a firm foundation where tenants and property owners could work together to solve the pervasive issues. Currently, the regulations act as burden for the landlords, the main facilitator of the resulting problems. In light of these absences, policy tries to enhance the operation of the private rented sector through the past decade have not been focusing on attempting to enhance the efficiency of the delivery of housing services through restricting costs or regulations and obligation. For instance, the government most focus has been on the social rented sector contributing limitedly to the solutions for the problems experienced in the private sector with projects such Guide to Dealing with Rogue Landlords33. However, additional restrictions are necessary in order to deal with apparent issues especially the rotten few but these regulations typically fail in their outlined objectives while unconsciously increasing costs. The Guide to Dealing with Rogue Landlords by the government links rogue landlords with illegal immigration overlooking other extensively significant matters such as affordability and insecurity. Ironically, regulations also pose threats to quality and this happens because the costs of operation of the parties that adhere to the rules increase leaving the market to the ones who do not abide by the regulations. A considerable degree of the regulatory burden is also endured by the taxpayers largely through tax forgone because of the increased landlord costs. Since most regulatory costs entail fixed sums instead of varying with the rent levels, the negative effects of the poorly developed regulation affect the properties with the lowest rent more adversely. Therefore, the poorer tenants as well as the regions with lower prices are likely to suffer the most from improvements in efficiency of the regulatory regime. Stating the benefits associated with marketing processes is contemptuously considered by some in discourses as supporting the profits of the landlords while neglecting the interest of the tenants34. Nonetheless, this is a false conclusion since the market processes are the core as well as the least cost protectors of the interests of the tenants. The encouragement of greater supply through reduction of the regulatory burden inspires investment and competition between the landlords and their tenants. This essentially increases standards in a more effective manner compared to state coercion. The existence of the contemporary private rented sector providing homes for millions of people has relied on investments inspired by a return to market principles almost twenty-five years ago. Effect on rents Increased costs of operation for landlords leads to an increase in rents and the private rented sector has demonstrated in the past twenty years to be an industry characterized by rapid growth in supply as a reaction to the increase in the comparative profitability of investments35. This is achievable even in a context characterized by tight supply of housing since most residential investments bases on the existing stock of housing and converting it from use in different tenures. Furthermore, in such times, investments can be made in stock conversions to an increased number of smaller-sized dwellings and modernizations, which add up increase rental supply while at the same time upgrading it. The disproportionate adjustments have less relevance when long-term effects are of interest in the manner they are in this case. All this demonstrates private investments in residential property is sensitive to comparative rates of return and the operating costs clearly influence them considerably so that in the end, they pass through of costs to the levels of rent are adequate36. Majority of the increases in cost are because of regulations tenants will have a say in after the implementation of the necessary reforms. The introduction of new regulations forms the firm foundation for the elimination of agents’ fees that contribute to the increased costs. Moreover, the number of rogue landlords could decrease not because of the ‘Guide to Dealing with Rogue Landlords’ but due to the introduction of the three-year tenancies and other regulations making it easy for the tenants to predict rent increases based on the economic statures not landlords’ interests. Unlike the property owners in other nations such as the US and Germany, it is illegal for landlords in the UK to subtract costs of depreciation in their taxes on rental income. In the encouragement of long-term holdings in the private rented sector, law in other nations discourage investments in the short term in private renting via the capital gains approach where deductions in the tax are applicable after selling the property. A different characteristic worth noting is when there is regulation of rent, landlords are sometimes permitted to increase the rent past the official limits to take account of the increasing costs or improvements made on the building. Different approaches often apply to newly built homes and numerous nations have deregulated such homes so the existing homes can continue having restrictions. What makes the UK different from other countries is the degree of its housing shortage as well as the subsequent pressures that arise for this situation. In light of the pressures associated with the housing market as well as the increase in costs across the board, the investments of landlords should also be more effectively directed into the construction of newer homes. With the increase in magnitude, it is likely to remove the housing benefit subsidies without having to leave tenants helpless. Therefore, the objective must be to restrict and decrease the housing benefit over time while providing newer safety nets for the tenants who have not done as well from the property boom like the others37. Unspecified leases along with in-tenancy rent regulation would be critical to limiting more increases in rent as well as a reliance on housing benefit. Along with the provision of greater security to the huge and increasing numbers of people in the private rented sector, there should be a proposal providing breathing space to the general taxpayer through restricting the future increase of the housing benefit bill. Furthermore, through encouragement of the private sector investment directed into the construction of newer houses, the proposal supposed to be developed may lessen some of the demand to buy homes, which has increased the prices38. Conclusion Definitely, the shortage in housing results from the increase in the number of properties in the private rented sector that has predominantly expanded through the purchasing of existing stock instead of newer build39. This has led to inflation in the price of housing hindering numerous private renters from moving into owner-occupation. A newer regulatory approach should be considered in order to deal with future rent growth while improving security for the tenants40. This is supposed to include indefinite tenancies whereby rents will only increase due to a measure of inflation. Typically, as a way of encouraging investments in new housing, new-build properties should have an exemption from this regulation; however, the property owners should be encouraged to enter voluntary arrangements in the longer term with their tenants in the cases where it is mutually attractive. This kind of framework may prove to be particularly receptive to institutional investors. A broader variety of incentives for investments in the private rented sector apart from the attractions of an extremely deregulated market as well as the prospect of capital gains through inflation in the price of houses should be part of the considerations made relative to reforms through the regulations41. They can be effective if the additional expansion of the private rented sector is seen as desirable in order to encourage investments in the longer term as well as those that will contribute to the supply of housing. European Cases Alex Mullins v. Eastleigh Borough Council (2012) 23 EHRR 413 Keddey v. Hughes (2010) ECR II-0000 Anslow v. 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