The case of the private rented sector
26 September 2006
Outcomes from a workshop that looked at the regulation of the private rented sector of the housing market.
The past 20 years have seen increased deregulation of the private rented sector, including the abolition of rent controls and reductions in statutory security of tenure. This was designed to encourage growth and reverse the significant decline in private rented stock during the post-war years. The private rented sector has been seen by the government as providing an important bridge between social (council and housing association) rented housing and privately owned housing. The lack of accommodation to rent in the private sector is a problem as many households do not qualify for social housing, but they are also unable, or unwilling, to purchase their own property (students, young people, migrant-workers etc).
Deregulation has encouraged a large increase in the quantity of small-scale buy-to-let ownership. Indeed, the majority of privately rented accommodation is let by small-scale, often part-time or temporary landlords. While this has been successful in creating a flexible and diverse market, it has also created problems. Lacking professional organisation, many landlords are unaware of their legal rights and obligations. As a consequence, some tenants are poorly served by their landlords, paying high prices for poor quality housing.
The Law Commission’s housing law reform program seeks to change traditional approaches to the landlord-occupier relationship through applying a ‘consumer protection perspective’ to occupation contracts. Many institutional investors have welcomed this, seeing it as a key factor in creating a more professional approach to renting, and thus encouraging large-scale investors (pension funds etc) to take investment in residential accommodation as seriously as in commercial property. The entry of larger scale investors into the market would be welcomed by the government as this would promote a general increase in professionalism, standards and self-regulation.
Many landlords and tenants are unaware of their legal rights and responsibilities
Current problems include the fact that many landlords and tenants are unaware of their legal rights and responsibilities – there are significant information gaps and limited sources of advice to fill those gaps. Neither landlords nor tenants are well placed to understand the details of their tenancy agreements and whether they comply with the law. Even if they are, they face many difficulties in pursuing a grievance through the courts. The required investments in finance, time and effort in issuing court proceedings to resist, for example, unlawful eviction or inadequate repairs, or deal with anti-social behaviour means that it is often just not worth doing that. The very nature of their tenures means that, for many tenants, it is simply easier to move to a different property if they are unhappy with their landlord, rather than pursue legal remedies. Even if successful, penalties for landlords found guilty in the courts are relatively modest.
The workshop considered what might be the best strategies to ensure compliance with regulation, thus hopefully improving landlord and tenant behaviour and reducing the number of problems and disputes. Contributors noted that in a market where there was such diversity, this a particularly difficult problem. Traditional forms of regulation – imposing heavier legal duties on landlords, for example, were unlikely to be helpful, given the general consensus in all three main political parties that widespread regulation would simply decrease supply, therefore pushing up prices and exacerbating the difficulties facing tenants.
Economists have argued that, without intervention by the state, the market would regulate itself. Poor landlords would be unable to sustain themselves as unhappy tenants would simply move elsewhere. However, these arguments are less convincing if there are acute shortages of available accommodation to rent. Especially towards the bottom end of the market there are difficulties in ensuring that landlords will fulfil their legal obligations; for example, in undertaking required repairs.
In poorer neighbourhoods the landlord has little incentive to do repairs
This is the result of two main factors. First, repairs are low on a short-term tenant’s list of priorities; they are more concerned with the size and location of the property and the functioning of their ‘white goods’, than with the general state of repairs which is seen as a longer-term issue. Second, in poorer neighbourhoods the landlord has little incentive to do repairs as this does not increase either the rental value, or the capital value of the property enough to make it worth it. So low-grade properties in poorer areas generally decline.
These are not necessarily individual or local issues – they have much wider social consequences. If premises fall into disrepair then the health of the inhabitants can suffer and this then becomes a drain on the NHS. Problems caused by poor-quality housing can spill out into the surrounding neighbourhood, eg anti-social behaviour, leading to the decline of ‘pride’ in an area which becomes seen as full of housing in a state of disrepair.
The conclusions from the workshop are that market self-regulation in itself is insufficient. Looking at history, the very nature of property is that it is very expensive and time-consuming to build, meaning normal market rules are difficult to apply. As a consequnce, policy reform will need to be extremely imaginative, involving novel applications of law to create incentives to improved landlord and tenant behaviour. The essays in this collection are an important starting point for the Law Commission’s work.