To What Extent Is Increased Legal Regulation of the Privately Rented Sector Justified And Desirable - Research Paper Example

Draft To what extent is increased legal regulation of the privately rented sector justified and desirable? Introduction UK’s private rented sector continues to a grow as a proportion of its housing stock with more and more people being forced to depend on it as the prices of houses increase and social housing experiences declines. It has been forecasted that the private rented sector will form more than a third of the housing stock of the UK by 2032. The cost of private renting is no longer proportional to wages and this implies that it has become increasingly costly for tenants and through the housing benefit bill that is 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 situation. 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. Furthermore, the security of tenure that is availed by private landlords, of between six and twelve months is not sufficient for families as well as the ones who have been shut out of the owner-occupation and social housing who are forced to make the private rented sector their home. 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 market as well as the benefits system. Currently, there are approximately four million homes in England that are privately rented and these accounts for about eighteen percent of all the households. the sector has also doubled in magnitude since 1989 and has more households presently compared to social housing while owner-occupation is on the decline. This has been complimented by the rapid rise in the housing benefit bill that has increased exponentially in regards to real terms through the same period reaching an excess of twenty four billion pounds in the UK. Consequently, the amount that is claimed by the people who rent from private property owners has also increased and doubled through the past ten years to almost ten billion pounds. These figures demonstrate the worsening affordability of private rented accommodation that an increasing number of people are forced to use as a consequence of the decline in social housing and challenges to home ownership. Along with the cost of renting, an additional issue that has emerged with the increasing reliance on private property owners has included the lack of security provided to tenants who seek long-term stability, especially the people who have children. All the solutions to the current housing crisis have to entail a considerable increase in the construction of new homes along with the social sector, but this does not mean that no action can be taken to lessen some of the related issues until when scarcity will cease being a defining aspect of the housing market. Furthermore, in London it remains conceivable that supply will never be equal to demand and this is 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 endeavors to reform housing benefit in an attempt to maintain the costs at a low level while ironing out any anomalies. While being mindful of the bloating costs, The Coalition sought to deal with the issue with reforms that have entailed moving LHA 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 a only one percent every year, initially they were revised every month 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 that are characterized by the highest increases in rent. 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 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. 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 monster it had initially created. This continues to be the case presently and thus requires that other means of holding down costs be identified and implemented. 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 has been squeezed after the recession. 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 industry. 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 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 this 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 rents regimes in the sixties that aimed at removing the impact of scarcity in the rental market. The initial step was an increase of 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. 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 came to an end 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 WW1. 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 twenties, they were unable to overcome the rise in public opposition to this attempt. 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. In the event that either party did not feel that the set rent 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 regulation initially remained where the tenants had not moved their homes since the eighties. The regulated tenants continue to have fair rents on the properties, which were determined by rent officers from 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. This has resulted in a series of legal battles since the nineties and for the first time, fair rents could be likened to examples of market rents in the same area or the same block. 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 that are relevant to issues such as the obligations of the tenants in terms of conduct 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 and they have no appreciation for the nature of the obligations they assume 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 apposition to understand if the included terms in the tenancy agreements they sign adheres 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 can be high. Court proceedings dealing with issues of apparent harassment until long after the assured shorthand tenancy has come to an end. On the other hand, the available solutions may not result in outcomes that are sought as the desired results may be those that are desisted by the other party from specific behaviors not essentially that 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 tenants. 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 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 persevere 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. If it is assumed that in the present circumstances neither the solutions provided by the law nor the market forces have likelihood of sufficiently enforcing obligations, the attributes of the private rented sector also pose a challenge for any attempts of enforcement from third parties. When there is no comprehensive and compulsory registration system knowing who should be subjected to regulations becomes challenging and this becomes 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 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 tenant’s deposits by their landlords. There have been reports that most of the tenants state that their associations with their landlords are not positive and that this is often as a consequence of failure to conduct repairs completely or within practical timeframes. 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 are processed to prosecutions by courts of law but in order to assume that unlawful eviction is not an issue would be ignoring the complicated factors through which the process of breach of obligations becomes judicial decision. In a similar manner, the absence of disputes between the tenant and the landlord cannot be assumed to indicate that all the legal obligations have been taken care of. It is the attributes of this sector that imply that the issues of compliance may be expected while also meaning that the problematic circumstances faced by the landlords or tenants are not likely to be seen in statistical records. Growth of the regulation burden Even though appears to acknowledge the significance of market processes as far as the private rented sector is concerned, the regulatory burden continues to grow. Court rulings have developed precedents that must be adhered to in the future and this has given additional layers to the regulatory creep. 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 thirty to forty percent of the gross rents. 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 landlords’ cost of operation may encourage investment as well as lower rents. Moreover, stricter regulations work in the opposite manner through increasing the costs of stifling incentives. Regulations have to deal with the basic issue of identifying inappropriate behavior and practices and this makes it difficult for regulatory agencies to point out exactly where it occurs, to enforce penalties as well as track them. 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 a will to support regulations that 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 is typically considered as market led and was freed up by legislation that was 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. These are not mere historic leftovers or obligatory requirements for an operational market but cautious attempts by the successive administrations to regulate the conduct of landlords as well as their agents. In addition, the tide of regulation has been growing in the recent past with pressure for more mounting. In the typical debates, there is a general acknowledgement that the private rented sector is a contemporary social and economic success story. Currently, more than four million households in UK live in it while in the last twenty years, the number of dwellings has increased twofold and private rented housing is currently valued at approximately 1.1 trillion pounds. This magnitude and rate of expansion as far as investment in rental housing is concerned are not paralleled either in history or in the rest of the globe. 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 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 century. 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. Reinforcing regulatory creep demonstrates a lacking in over-riding vision of the way of letting the market process gain the desired housing ends. 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 obligations. However, additional restrictions are considered to be 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. 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 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. Therefore, the poorer tenants as well as the regions that are lower priced are likely to gain 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 tenants. 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 that provides homes for millions of people has relied on investments that have been inspired by a return to market principles almost twenty-five years ago. There is an increased degree of consumer satisfaction in the private rented sector that have been rising through time regardless of the rapid expansion that has taken place in recent years. Focus on costs of operating In the process of the UK moving towards growth, rises in rent is taking place as a result of the decreasing of supply in the face of increasing demand. There would be more housing if the venture was profitable, but top of the general shortage of housing, the costs of operating in regard to the provision of housing are substantial and this increases the rents while discouraging investment. The costs of operations are the expenses that are incurred while running a rental housing business apart from the direct capital into the property or the costs associated with depreciation. They are linked to the management of tenants and the property, arrears and vacant houses as well as taxation and adhering to the requirements prescribed by the regulations. There is an increasing appreciation of the considerable magnitude of operating costs in the private rented sector as a result of the fact that large scale investors are presently showing reluctance to make investments in housing because of them. The Mortgage Report proposed that they were of the order of thirty percent of gross rents while others have stated higher figures of approximately forty percent. Recently, governments have focused in encouraging investment in the private rented sector but there are no moves to assess the effect of regulations on the costs of operation even though it would be a beneficial route to seek. This proposes a re-evaluation of the current state of regulatory policy away from more control. Reducing the costs of operation through reassessing the costs and benefits characteristics of the present regulatory regime as well as their effects in the operating costs of the landlords might inspire investments. 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 investments. This can be achieved even in a context characterized by tight supply of housing since a lot of residential investment is based in 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. This process of changes in the rental supply has likelihood to be quicker in regards to increased compared to declines since landlords have a propensity to take some time while unwinding the previous investments during structural changes like increased costs imposed by more regulation. Nevertheless, the disproportionate adjustments have less relevance when long-term effects are of interest in the manner they are in this case. All this demonstrates that 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, the pass through of costs to the levels of rent are adequate. Majority of the increases in cost are as a result of regulation, which will eventually be shouldered by tenants. Unlike the landlords in other nations such as the US and Germany, the landlords in the UK are not permitted to subtract costs of depreciation in their taxes on rental income. Losses associated with rent income may also be deducted from other taxable income in other nations thereby decreasing the pressure from the landlords to increase the rent. In the encouragement of long term long term holdings in the private rented sector, other nations also discourage investments in the short term in private renting by via the capital gains approach where deductions in the tax are applicable after the property is sold. A different characteristic that is worth noting is that 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 are often applied to homes that are newly built and numerous nations have deregulated new homes so that existing stock can continue being subjected to 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. If the private rented sector wishes to provide a bigger proportion of housing needed for families as well as those who would customarily have desired to purchase a home, then it must provide a better deal for the tenants. This implies an increased security of tenure along with more predictableness and affordability in rents. The housing benefit model has gone passed the boundaries of its practicality as a safety net since the more people who depend on it, the more it will increase the rents while complicating the actual market prices. 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 others. 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 that provides breathing space to the general tax payer through restricting the future increase of the housing benefit bill. Furthermore, through encouragement of the private sector investment to be directed into the construction of newer houses, the proposal that is supposed to be developed may lessen some of the demand to buy homes, which has increased the prices. Conclusion The shortage in housing has been fuelled by 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 build. This has led to inflation in the price of housing that is 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 tenants. This is supposed to include indefinite tenancies whereby rents will only be permitted to increase in relations to a measure of inflation. So that investments in new housing can be encouraged, new-build properties have to be exempted 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 also be considered. they can be utilized if the additional expansion of the private rented sector is seen to be desirable in order to encourage investments in the longer term as well as those that will contribute to the supply of housing. Read More