The Federation welcomes the opportunity to respond to the Work and Pensions Committee's inquiry into progress towards implementation of Universal Credit (UC). In this submission, we have set out the Committee's invitation in italics, followed by our comments in plain type.
1.2 There are several categories of household for whom owner-occupation is unsuitable or inaccessible and social housing may not be available. These include: young people without substantial savings; people moving to take work of a temporary nature (although not necessarily ill-paid); people emerging from relationship breakdown; students; and persons from overseas temporarily residing in the UK. The ten sub-markets identified by Rugg were: young professionals; students, Housing Benefit claimants; slum rentals; tied housing; high-income renters; immigrants; asylum seekers; temporary accommodation, and regulated tenancies (ie governed by the Rent Act 1977). It has since been argued that an eleventh sub-market is emerging in the form of "Generation Rent": that is, people of moderate income for whom rising house prices and a tougher mortgage market mean that owner-occupation is not a realistic option, so that they are likely to be renting in the long term, perhaps indefinitely.
1.3 Unsurprisingly, this range of markets is matched by a similar disparity in the quality of housing in the PRS and the way it is managed. In practice, landlords within the PRS tend to position themselves within one or other of these sub-markets, so that (for instance) a landlord seeking to let a property to young professional tenants is unlikely to respond favourably to an approach from a benefit claimant. This means that sub-markets tend to operate in a discrete manner, notwithstanding that there will sometimes be a degree of overlap between them. Caution should therefore be exercised in thinking of the PRS as an undifferentiated category requiring a single policy response, as there is a serious risk that a policy designed to deal with a problem in one part of the PRS may have unforeseen and adverse effects elsewhere. For example, tenants in some parts of the PRS might well prefer longer-term security, say for five years; but a policy of encouraging such longer tenancies would be irrelevant, at best, in other parts of the PRS such as student housing and temporary housing, while a policy of making longer-term tenancies mandatory would effectively kill off student and temporary housing.
1.4 A striking feature of the PRS is that most of its sub-markets rely to a marked degree on relatively small landlords with only a few properties. Many of these are private individuals whose main income is derived from other sources such as paid employment, for whom private letting is therefore something of a sideline. Of the Rugg sub-markets, only student housing seems to have attracted a substantial degree of investment by larger institutional bodies (although even here, small individual landlords are common).
1.5 In November 2011, the then Housing Minister Grant Shapps commissioned Sir Adrian Montague to examine the barriers to large-scale institutional investment in the PRS. The Montague Review, which reported in August 2012, found that the underlying fundamentals of the PRS are strong in that rents have tended to rise in line with average earnings while underlying property values have risen steadily (despite a tendency for dramatic short-term variations).
1.6 Montague also acknowledged, however, factors weighing against investment, including the relative novelty of the sector, uncertainty about possible political or legal changes, and relatively high management costs compared with commercial property. Of these issues, the first (novelty) will presumably diminish over time; the second (political or legal change) is an occupational hazard with any form of investment, although perhaps more acute with residential letting in view of its high profile and the large number of members of the public directly affected as tenants; while the third (high cost of management) is off-set by the high level of capital appreciation, although this has the drawback that realising it depends on the investor's willingness to exit the sector.
1.7 In the short term, it seems likely that the real and perceived barriers will mean that large-scale commercial investment will remain sluggish, unless Government chooses actively to encourage it by incentives of various kinds (as outlined by Montague): the initiatives announced by Government in September 2012 may go some way to achieving this. Another possibility would be a more sympathetic fiscal regime. For instance in Germany, often cited as an example of a large developed country where the PRS accounts for a healthy 49% of the housing market, landlords' mortgage interest payments and the costs of administering and refurbishing dwellings are tax-deductible: in short, private renting in Germany is taxed like a business, rather than as a form of unearned income as it is in the UK, and investors have responded accordingly.
1.8 Housing associations, however, as established developers and managers of rental housing, are well placed to move into market rental and many are already doing so, especially in student housing but increasingly in other areas. A key aim for them in doing so is to make prospective tenants a better offer than is currently available, thereby raising standards. Moreover, they are likely to develop new housing for the purpose, in contrast to some other investors who might prefer simply to acquire existing stock and thus not increase overall housing supply.
1.9 Any large-scale investment in new rented housing, whether by housing associations or commercial investors, will require not only the prospect of a reasonable return but also an adequate supply of suitable land (much of which is likely to come from public bodies) as well as a sympathetic approach by planners. However, it is essential that any increase in provision for the PRS should be in addition to, not instead of, planned investment in affordable housing.
1.10 It has been argued that large-scale institutional landlords in the PRS would help to overcome perceived poor management by small-scale, amateur private landlords. This idea needs to be treated with caution. For one thing, in countries such as Germany and Switzerland where large landlords are common in the PRS, they tend to be in addition to, not instead of, small-scale landlords, who are also common in those countries. It therefore seems likely that the small private landlord will remain a major feature of the PRS for the foreseeable future, whether or not large institutional landlords also become involved. What is likely, however, is that the entry of new landlords will, in itself, raise standards by increasing supply and thus consumer choice.
1.11 It will also be important to focus policy responses on the bottom end of the market where there is are obvious problems with some very poor accommodation and low standards of management. Such a targeted approach is likely to be far more effective than measures applied to the PRS as a whole.
1.12 As a first step, local authorities should be encouraged to make fuller use of their existing powers to intervene to deal with sub-standard property. Consideration should be given to measures that would encourage private landlords at the bottom end of the market to improve the standard of their property. One possibility would be to allow them to receive Housing Benefit or Universal Credit directly if they will undertake to achieve a defined standard.
2.1 Rent control, in the traditional sense, operated throughout the UK until 1989, so a ready indication is available of its likely effects. By 1989 the PRS had shrunk to only 11% of the total housing sector and new private lets were virtually unobtainable in much of the country. Although rent control would, of course, be positive for existing tenants (provided they are content to stay in their current home), it would act as a powerful deterrent to any new lettings and would thus work very much to the disadvantage of anyone hoping to find a private tenancy in the future.
2.2 While large rent increases attract understandable criticism, they should be seen in the same light as increased house prices: that is, they are the result of an underlying problem of lack of supply. Addressing rent increases in isolation is tackling a symptom rather than the root cause. Moreover, the UK's experience shows how rent regulation distorts the housing market by limiting the return achieved by letting a property while placing no restriction on the return achieved by selling it. There is little point in creating a regulatory regime unless it keeps rents below the market level; yet if this is its effect, the result is that owners will prefer to sell and the supply of rented housing will be choked off. This is exactly what happened before rent deregulation in 1989.
2.3 For households without access either to owner-occupation or to social housing, the effect of rent regulation is likely to be that they will be left with, almost literally, nowhere to go. The Federation therefore argues that rent controls should not be reintroduced, but that steep rent increases, like rising house prices, should be interpreted by policy-makers as a warning sign that housing supply is inadequate and should be increased. While we recognise that the Committee does not wish to focus on the issue of overall housing supply, the point needs to be made that net household formation in England is currently running at 240,000 annually, roughly double the rate of house building; a state of affairs that is inevitably reflected in house prices and rent levels.
2.4 An alternative to traditional rent control would be an approach of encouraging the grant of longer-term tenancies, perhaps with inflation-based rent increases during the term. However, if tenancies of this type were made mandatory the effect would be to discourage investment in the PRS, as well as to damage types of private renting (such as student housing and temporary housing) for which they would not be suitable. Landlords could, however, be given suitable incentives to use this kind of tenancy; more favourable tax treatment would be one possibility.
3.1 There is already a substantial body of regulation that applies to the PRS: for instance, it is subject to s11 of the Landlord and Tenant Act 1985, making landlords responsible for repairs; and tenants are entitled under s48 of the Landlord and Tenant Act 1987 and s20A of the Housing Act 1988 to basic information (where it has not already been supplied) about the identity of the landlord and the terms of the tenancy. In addition, shorthold tenants' deposits are now subject to a substantial degree of protection backed by severe sanctions for non-compliance.
3.2 Regarding further regulation, we recommend that any specific proposal be directed as specifically as possible to the part of the PRS where it is needed. For instance, we support the existing power of local authorities to impose a licensing scheme (subject to SoS approval) where they think it is needed to deal with low demand or anti-social behaviour; but we do not think the case has been made for a blanket licensing scheme. In Scotland, where such a national scheme exists, enforcement has been inconsistent and patchy, and there is no evidence that it has either improved the standard of the PRS in Scotland or dealt effectively with rogue landlords.
3.3 A better targeted approach to the issue of rogue landlords would be more effective and rigorous enforcement action by local authorities, including criminal prosecution where appropriate, using the extensive range of powers that already exist. In particular, in respect of HMOs and houses subject to licensing schemes, local authorities have powers under the Housing Act 2004 to take over the management of premises, in addition to there more general enforcement powers where residential premises are unfit or a nuisance.
4.1 In the owner-occupation sector, estate agents are subject to regulation but privately arranged sales are not. We agree that there is a strong case for applying a similar arrangement to the PRS, as proposed by the Royal Institute of Chartered Surveyors, so that letting agents are required to register with a complaints resolution scheme and are, in particular, required to set out clearly and charges that tenants or prospective tenants will be required to pay. It is anomalous that someone barred from acting as an estate agent should remain free to operate as a lettings agent.
5.1 HMOs require special treatment given that they are likely to be concentrated at the bottom end of the market, occupied by residents with no real alternative. In these difficult circumstances, we feel that for the most part, current regulation works as well as can be expected. However, we suggest that the definition of the term "HMO" may be due for review, in that it currently captures some relatively small properties such as houses converted into three or four self-contained flats; these are not properties that would normally be regarded as being multiply occupied as most people would understand the term, and in terms of both fire safety and overall standards they belong more with the general singly-occupied housing sector than with HMOs.
6.1 Security of tenure goes hand in hand with rent control because without it, landlords can simply avoid any restriction on rent increases by evicting the current tenant and reletting the property at a higher rent. Moreover, long-term security of tenure would discourage investment in the PRS by potential landlords (whether individual or institutional) because it would mean that they could not easily dispose of their assets. This in turn would mean that privately rented property would almost certainly cease to be acceptable as security for loans, which again would choke off investment in the sector.
6.2 A common criticism of the PRS is that landlords can require tenants to move out after as little as six months. In practice, of course, landlords do not behave in this way: the Survey of English Housing indicates (Rugg, p81) that 55% of shorthold tenants in the PRS had been at their address for over a year, and it should be borne in mind that this figure is skewed by the presence in the PRS of markets such as temporary housing and student housing where tenancies will generally be for less than a year. Moreover, there is already a marked trend for PRS tenancies to last longer: the UK Housing Review 201112 reports that as many of one-seventh of assured tenancies in the PRS are full assured rather than shorthold, and notes that the proportion of PRS tenancies lasting ten years or more has doubled in the last decade (and this despite the gradual reduction in the number of pre-1989 "Rent Act" tenancies during this period.
6.3 However, we agree that it is understandable that tenants wish for security over a longer period than six months, especially as the PRS increases in size and the profile of tenant households changes. Between 2001 and 201011, the proportion of households headed by someone aged 25–34 that were private renters more than doubled from 19.3% to 40.6%; where the household head was 35–44 the proportion rose from 9.3% to 18.5%: so the PRS includes more and more households, many with children, where renting is likely to be for the longer term.
6.4 There is, of course, nothing under present legislation to prevent landlords and tenants from agreeing a longer term if they wish to do so. Indeed, it has been argued that tenancies for a term of, say, three to five years would be to the benefit to landlords by providing certainty over a longer period. However, this is true only if the full term binds the tenant as well as the landlord; it seems likely that many tenants would be reluctant to enter into such a commitment. A further point is that lenders specialising in buy-to-let mortgages generally restrict the length of tenancy that can be granted; whilst some restriction on the length of terms is understandable, we hope that as the sector matures lenders may be willing to countenance somewhat longer terms. Finally, we also suggest an amendment to s52 of the Law of Property Act 1925, which currently requires the grant of a term of more than three years to be executed by deed. It would simplify the grant of longer terms, and perhaps send a useful signal, if this threshold were increased to seven years to coincide with the criterion for land registration.
7.1 This was a major reform in the Localism Act 2011, but it did not take effect until 2012 and it is too soon to assess how well it is working in practice.
7.2 During the passage of the Localism Bill, the National Housing Federation raised concerns about the suitability of particular PRS accommodation into which homeless families might be placed. In response to those concerns, and to those expressed by other organisations across the sector, the Government agreed to set out additional regulatory safeguards to ensure that PRS offers are suitable.
7.3 It remains a matter of particular concern that the Government's welfare benefit caps would make it much harder for local authorities to find affordable accommodation in high-cost areas like London. This is exacerbated by the Government's plans announced in the Autumn Statement in December 2012 for real-term cuts to LHA, will almost certainly increase the pressure on local authorities to seek accommodation for their homeless residents farther afield.