Why governments should not enforce long-term contracts in the UK’s private rented sector

Oct 15, 2013Occasional reports, Regulation & Enforcement, Reports

This report argues that recent proposals to introduced fixed-term contracts and bans on real rent changes within them are poorly thought out. If such tenancy rent control schemes were enforced, they would fatally undermine the huge increase in the private rented sector of the past two decades.
Despite claims to the contrary, landlords would face higher risks and lower returns; while the beneficiaries amongst tenants would be few and the losers many. Accommodation shortages would grow and general rent levels would rise. Some of the most vulnerable groups would be amongst the greatest losers. It is not low income groups that would benefit but a handful of relatively prosperous ‘insiders’; with outsiders left in the cold or to be exploited in informal markets.
Casual reference to practices in Europe, where tenancy rent controls are common, ignores key facts: particularly that in many countries investment is weak and landlords are unable to respond to rises in demand because of caps on rents; that private renting is kept afloat by tax breaks and subsidies on a much greater scale than those in Britain; that large-scale regulatory bureaucracies are generated by controls; that there is frequent discrimination; and, that with controls renting becomes a political football at national and local levels.
Obviously, it is unreasonable to object to long-term rental contracts if they are freely entered into by both parties. The government has recently proposed such a contract and is currently working towards providing a new model tenancy agreement, However, it will not be made compulsory and there must doubt as to how widespread will be its adoption. Of concern is that this approach will become a stepping stone towards compulsion. (Further measures aim to limit the charging of fees at the time of tenancy renewals are to be welcomed and do not form part of the discussion here.
At present, the minority of tenants who want to stay in their current accommodation for long periods of time often end up with a long-term tenancy and discounts to prevailing market rents, because many landlords like having such tenants. This behaviour has wrongly been leapt on as justification for the need for the state to make it a universal requirement. Rather the argument here is that such a programme would fatally alter key institutional arrangements that at present enable long-term ‘discounted’ extended tenancies for most of those who want them, alongside large-scale investment. Instead, the heavy hand of the state could easily and rapidly damage the transformation of the private rented sector over the past two decades.

Housing costs are high in the UK and rents are expected to rise at what many would regard as alarming rates in the future, as housing supply persistently fails to keep up with burgeoning demand. Threatening the viability of the only tenure that has housed growing numbers of people in the past decade is an odd response to such a crisis. The UK needs more homes, not regulations that put off investment. There is no case for governments to intervene to either enforce or incentivise long-term contracts. No market failure exists; rather formal, fair, mutually binding long-term rental contracts are generally unattractive options in the UK housing context.

This report was written and researched by:

Professor Michael Ball

Professor of Urban and Property Economics

Professor Michael Ball is the Professor of Urban and Property Economics at Henley Business School, University of Reading. Michael’s research interests cover housing studies, urban economic, commercial property investment and real estate markets, urban regeneration, land-use planning, urban history and construction economics.

He has published extensively, co-authored the textbook, the Economics of Commerical Property Markets, and was author of the annual RICS European Housing Review (www.rics.org), which was for 12 years the prime publication on European housing markets.

He was Lead Panel member of the Housing Market and Planning Analysis (HMPA) Panel of the Department of Communities and Local Government, from 2007-2010 and has advised many other public and private bodies. He also co-chairs the Economics Group of the European Network for Housing Research.