The UKs Private Rented Sector - Essay Example

EXAMINATION OF THE EXTENT TO WHICH INCREASED LEGAL REGULATION OF THE PRIVATE RENTED SECTOR IS JUSTIFIED AND DESIRABLE 3rd May, 2015. Introduction The UK’s private rented sector continues to grow as the proportion of its housing stock with more and more people turning to it as the prices of houses increase and social housing experiences a decline.1 It has been forecasted that the private rented sector will form more than a third of the housing stock of the U.K. by 2032.2 The cost of private renting is no longer proportional to wages. This implies that renting has become increasingly costly for tenants.3 Additionally, housing benefits have an inflationary impact on the levels of rent especially at the lower end of the market, thereby making life more unbearable for the tenant community.4 In some of the sub-markets that are characterized by a high number of claimants, the impact of this is especially acute with the landlords being able to set rents at levels that are artificially high to match the Local Housing allowance.5 Furthermore, the security of tenure (of between six and twelve months) availed by private landlords is not sufficient for families as well as those who have been shut out of the owner-occupation and social housing and who have to make the private rented sector their only option. The private rented sector has gone through extraordinary revitalization over the last twenty years to become increasingly critical to housing market and the benefit system considerations.6 Currently, there are approximately over four million houses in England that are privately rented. They account for about eighteen percent of all the family units.7 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 decline.8 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 ownership.9 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 that no action can be taken to lessen the related issues. In the meantime, scarcity is a major defining aspect of the home markets. Furthermore, in London, it remains conceivable that supply will hardly ever match demand. The above perspective of the U.K.’s private rented sector outlines the great importance it plays in the lives of people, mainly those living in the urban centres. It is this assumed importance against the need to protect the customers (the general citizenry) from unreasonable treatment that has formed the basis for enhanced regulation of the sector. Apparently, the economic view of it shows that the market is unlikely to self-regulate, which means that triggering of consumer exploitation could visit authorities by surprise. Consequently, this essay argues in favour of increased regulation of the sector, taking into view the current state of legislation and its effects on the stakeholders. The following sections discuss the extent to which legal regulation of the sector is justified and desirable. The U.K.’s Private Rented Sector: Reforms and the Underlying Problem As much as sector operators are not enthused by extra introduction of regulations that would seemingly limit their power and capability to self-regulate, the government has also indicated on several occasions that it does not intend to enact extra regulatory framework for the sector. In fact, the government has resorted to using alternative approaches, including providing the sector’s operators with suggestive guidelines indicating its expectations. One such guideline is the Model Tenancy Agreement, which stipulates the nature of tenancy contract entered between landlords and tenants.10 There have been several other endeavours to reform housing in an attempt to maintain the costs at a low level while ironing out any anomalies.11 The most recent attempts have seen the enactment of the Code of Practice.12 The Code provides a framework denoting the roles of both the tenant and the landlord/ property managers. An additional change has been capping the uprating of Local Housing Allowance (LHA) levels at only one percent every year; initially they were revised every month in relation 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 that are characterized by the highest increases in rent.13 Nonetheless, this will not stop more people from developing a reliance on housing benefits as rents continue to increase. Besides drafting the Code of Practice, the government has come up with a few other indirect regulations; some of which are internally treated as regulatory frameworks and check lists for local authorities to use. In that sense, they do not appear to directly engage the property managers or landlords, but end up having an impact on the general relationship between the latter and their tenants. For instance, the 2015 ‘Improving the Private Rented Sector and Tackling Bad Practice: A Guide for Local Authorities’ drafted by the Department of Communities and Local Government effectively outlines what constitutes both good and bad practice, indirectly benchmarking a regulatory field for the landlords and property managers.14 Similarly, the government’s efforts to engage more expertise into the Draft Tenants’ Charter (founded in 2013) culminated in the document ‘Renting a Safe Home: A Guide for Tenants’ which is another basis for indirect regulation.15 Referring to the above instances of what the government refers to as its ‘non-intention to further regulate the private rented sector’, there is adequate evidence that the non-intention aspect is indeed non-existent. This is because despite the stated pledge, there has been a sustained campaign to provide indirectly regulating material, captured in the form of the above mentioned documents. The question in this context is: ‘how much regulatory authority do these indirect regulations have?’ Unavoidably, we realize that the documents stipulate the minimal expectation from the landlords and property managers, failure to which the offender is considered to have flaunted the guiding code of conduct as provided by the government. That is, failing to abide by the indirect regulatory framework amounts to breaking local government laws. This paints the picture of a government busy regulating a sector it says it has no intention of regulating. This pushes the argument to the next level: ‘what are the motivating factors behind this sustained regulation and increase in the number of regulatory frameworks?’ The only possible reason to this question is observed inadequacy in the existing legal framework. Undeniably, the government is constantly updating the regulations based on observed number of legal loopholes in the existing framework. Consequently, the government has an obligation to seal any existing loopholes up to a level that it feels there is adequate protection of all parties to a tenancy. With increased reliance on housing benefit as a safety net, it has become impossible to get rid of it without 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 that housing benefit would result in increased rents to levels that the working population would not be able to afford and that the system would become fraudulent were dismissed as being irrelevant.16 By the time the imperfections started being considered seriously, increasing rents, rampant corruption and out of control housing bills left the government with limited ideas on how it could be able to control the uncomfortable situation. This continues to be the case presently and thus requires that other means of holding down costs be identified and implemented. Rent regulation Regulation of rent has been increasingly featuring on the government’s agenda in the recent past since the costs of housing have continued to increase while income has been squeezed after the recession17. The U.K. has previously faced rent regulation when controls were put in place between 1905 and 1989. In the same period, there was considerable decrease in the size of the private rented industry.18 Since rent control was abolished and assured short-hold tenancy established, the private rented sector has been rejuvenated. It is not easy to deny that having prices that are lower than those property owners would charge can make the sector 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. Rent controls in the United Kingdom were instigated in various forms that varied from a straightforward freeze during the world wars to fair rent regimes in the 1960s that aimed at removing the impact of scarcity in the rental market.19 The initial step was enactment of the Rent and Mortgage Interest Act of 1915 that limited rents for unfurnished homes meant for the working class to specific levels at the beginning of the war in 1914.20 This went through amendments soon after in order to restrict the ability of landlords to take back the property and use it for different purposes. It was intended as a temporary measure that was supposed to expire six months after the war but was extended into the subsequent years while covering almost all the properties by 1920 as a response to the shortage in housing that followed World War 1. Nonetheless, rents were allowed 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 1920s, they were unable to overcome the rise in public opposition to this attempt.21 There was a reintroduction of security of tenure as well as fair rents through the 1965 Rent Act that established a rent system that sought to allow the market rates to be agreed upon between landlords and their tenants.22 In the event that either party did not feel that the negotiated amount was fair, they were at liberty to seek the adjudication of a rent officer. New private tenancies regulations were scraped through the Housing Act of 1988; however, a smaller number of tenancies that were under initial regulation remained in cases where the tenants had not moved from their homes since the eighties.23 The regulated tenants continue to have fair rents on the properties, which were determined by rent officers from the autonomous Valuation Office Agency. In the determination of fair rent, officers are supposed to make calculations of the rent that is supposed to be paid in the event that the provision of similar homes was not scarce.24 Salient Characteristics of the Privately Rented Sector Most tenants 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 terms in the tenancy agreements they sign adhere to the law. The costs that the landlords or their tenants incur as they seek to enforce their rights as well as the obligations of the other party are sometimes high.25 On the other hand, the available solutions may not result in outcomes that are sought, as the desired results may not be favourable to the other party. Based on these aspects, the law plays a comparatively minor part in regulating majority of the relationships between landlords and tenants.26 Comparatively few tenants pursue actions against their landlords and the ones that follow this path often do not follow the entire process to its conclusion (it is sometimes less costly and less hectic to deal with the issue by 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 as a result of frustrations with delays related to adhering to the prescribed processes. Despite there being good reasons to believe that the private rented sector is faced with issues of compliance, the data that is 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 tenants’ deposits by former landlords.27 Interpreting these circumstances to essentially imply a breach of legal obligations needs a good understanding of the binding legal framework. The Regulation Burden 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 to track them.28 In these circumstances, there is high likelihood that cost effectiveness will be poor while the concerns of the landlords about the rising tide of regulations continue to increase. Research has demonstrated that landlords have the will to support regulations that may address the issue of the reputation of the private rented sector whose prudence has been damaged by some landlords with poor or crooked conduct. The tide of regulation has been growing in the recent past with pressure for more mounting. It is also acknowledged that market processes are the main drivers of this achievement and that maintaining a free market is important to sustaining investments as well as sustaining a competitive environment. Rather, it may be argued that there has been failure to acknowledge the cumulative effects of regulation on the cost of making rental housing available. In light of these absences, policy attempts 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 obligations.29 Regulations also pose a threat 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 that is forgone as a result of the increased landlord costs. Since most regulatory costs are typically 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. 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 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. Read More