The impact of regulation on the private rented sector

Apr 10, 2014 | Regulation & Enforcement, Reports

Though everyone seems to recognise the importance of market processes in the private rented sector, the regulatory burden is high and growing. The regulatory machine has swept along in a series of piecemeal measures driven by populist debate, many of which claim to have identified another ‘market failure’ requiring state controls. In addition, court rulings develop precedents that have to be followed in the future; adding further layers to regulatory creep.

There is a growing understanding in policy circles of the substantial scale of operating costs in the private rented sector, estimates of which range up to 30-40 per cent of gross rents. However, at present, there is no move to examine the impact of regulations upon them. This report argues for the need to look at regulatory costs and the poor value for money associated with them.

“…In contrast to current experience, a useful mantra for private rented sector policy debate would be ‘the benefits of regulation are often limited, but the costs are not.”

Getting operating costs down through re-assessments of the costs and benefits of aspects of the current regulatory regime and their impacts on landlords’ operating costs would encourage investment and lower rents. Tighter controls do the opposite by raising costs and stifling investment incentives.

Conclusions in brief

  • Further major private investment in rental housing is needed in the face of the UK’s growing housing crisis. But it is likely to be held back by a failure to recognise the negative consequences of the way in which state regulation currently engages with the private rented sector.
  • This is not to argue for a free-for-all. What is required is a holistic view of market processes, recognition of the limits of state engagement, and action to contain the regulatory burden.
  • The sensible way to evaluate any proposal aimed at regulating the private rented sector is to undertake a cost-benefit analysis (CBA), comparing the costs, direct and indirect, with the value of the benefits expected to be achieved. Sensitivity analysis should be undertaken as well; particularly to counter any potential optimism bias.
  • Policy should move beyond populist debate and a stampede towards more regulation. A good start would be an extensive review of the current regulatory framework, using rigorous data and cost-benefit analysis. Where good quality data are unavailable, policy should err towards the removal of regulatory control on the grounds of case not proven. Emphasis should also be put on avoiding the exaggeration benefits; on recognising the limits of state actions; and on a properly integrated analysis of the impacts on operating costs, investment, and rent levels.
  • In contrast to current experience, a useful mantra for private rented sector policy debate would be ‘the benefits of regulation are often limited, but the costs are not.’

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.