Shelter’s Income and expenditure figures highlighted13:57 PM, 4th February 2019
About 2 weeks ago 35
I offer here a brief critique of the report which has just been published by the Joseph Rowntree Foundation.
To download the full report please CLICK HERE
Those of you who are aware of the debates surrounding Section 24 and who have kept abreast of our research findings on Property118 will know that we are the ones who brought attention to the need to compare the UK Government’s fiscal attack on private landlords with what had occurred on two occasions in Ireland. Until recently the Treasury had not uttered a word on this matter; indeed it is reasonable to assume that George Osborne was unaware that similar policies had been implemented with disastrous effect in Ireland in the last two decades.
So, in principle, one would have welcomed JRF’s decision to develop these comparisons which we initiated and perhaps highlight the dangers of taxing some landlords into bankruptcy; Section 24 means some landlords will have to find the money to pay tax even on a loss in their businesses and as these are more likely to be portfolio landlords (because they pay the most in interest and interest is now not deducted as a legitimate expense, but taxed as though it were still in landlords’ pockets), the collateral damage on tenants in the UK PRS will be immense and is in fact likely to be more extreme than what occurred in Ireland. In its first incarnation in Ireland, there was a 50% rise in rents over the period of 1998 to 2001 when it was in operation (and, unlike in the UK, it did not apply to properties already owned, but only to new purchases, so it was a far milder version than that currently being phased in in the UK).
However, having read the report, I found it to have very different emphases. Most notably, there is an underlying assumption by the authors that the way in which the Irish Government has regulated the Irish PRS is a positive model to be emulated in the UK; this strikes me as all wrong, as culturally the Irish PRS appears to be far more fractious and dysfunctional – probably more like the UK PRS of the 1970s. However, the other key assumption they make is that the English PRS is in a bad state and needs to be reformed. From my perspective as a landlord I know that most private rented housing is of good quality and around 80% of UK tenants are satisfied with their private housing. Despite recent Government utterances about the UK housing market being ‘broken,’ this certainly doesn’t apply to the PRS, which is well-functioning and dynamic housing tenure.
So the whole premises behind the report strike me as ill-conceived and I would ask: who thought it was worth spending money on analysing the Irish PRS as something to be copied? There ARE lessons to be learned from what is happening in the PRS in Ireland, but the main lesson is that the Government should not launch a tax assault on landlords; not unless it wants to see spiralling rents and increasing levels of homelessness. In this regard, Ireland is the antithesis of a role model.
I will now examine specific points they make and give my view on them.
The authors state:
‘The challenging issues of affordability, security and property management have raised interest in regulation of the private rented sector in England.’
Since there are over 200 regulations already in force which apply to private landlords, who are they suggesting have this raised interest in regulation? Does this mean they want even more regulation? Do they think that introducing ever more rules and bureaucracy, often with associated costs, will lead to the greater supply of rented housing desperately needed?
The authors then argue:
‘Incentives are important to encourage regulatory compliance amongst landlords. In Ireland and England, compliance with registration or licensing conditions can be encouraged through eligibility for tax relief or restrictions of powers for those who fail to comply.’
Being able to deduct finance costs to arrive at profit is not an incentive. It was a central tenet of tax law for centuries until it was removed this month (as it also was in Ireland before Government abandoned the use of basic logic in the tax system, namely that ‘profit = income – costs’). As the Institute of Chartered Accountants of England and Wales has pointed out:
‘The idea that landlords will be taxed on the profit of their businesses, but not be allowed to offset the costs of creating that taxable profit is absurd, unjust and unsustainable. It overturns a fundamental, centuries-old principle of taxation.’
The authors should not therefore be calling a partial restoration of a fundamental right as an ‘incentive.’ It is necessary to call for a complete restoration of it as a matter of justice and common sense. Only then can one realistically look at encouraging people to invest in the provision of rented housing by examining the kinds of incentives offered in other countries.
For example, one incentive which would interest landlords and might persuade them back into the market after the scrapping of Section 24 would be to (re-) introduce the tapering relief enjoyed by landlords in Germany and other advanced nations so that if they own a property for 10 years there is no Capital Gains Tax to pay. In fact, I am surprised Germany was not chosen as the role model (it usually is).
The authors go on:
‘Longer-term tenancies with protection from eviction can increase feelings of security, but these can be undermined by lack of affordability and poor property conditions.’
I believe what this means is that in Ireland, longer tenancies have been introduced and ‘coincidentally’ the problem faced there is that rents are too high, supply is insufficient and the current housing stock can be poor. They do not seem to think that these are all interconnected and later on in the report suggest that regulation is not as important as the disallowing of finance costs in terms of disincentivising investment. I agree, but I think it is also a very important disincentive, even if it is secondary (and that is only because the fiscal attack is so disastrous).
The authors have taken on board Shelter’s recent campaign for longer tenancies in the UK, but omit to mention the fact that the average length of tenancies in the UK has grown to around 4 years anyway. No statistical evidence is provided that longer tenancies are something the vast majority of tenants want. Advocating for longer tenancies across the board does not make sense; many workers, students and so on would not want this.
The report seems to be a kind of ‘tenants rights’ manifesto in many ways; the input of landlords’ views is tiny relative to the input of tenants’ viewpoints. So it should not be presented as an impartial account; it seems to be very ideologically driven.
So the authors appear to be attempting to advocate for tenants when they mention affordability and when they talk about poor property conditions, but key concerns of landlords are scarcely addressed at all. That is not likely to lead to landlords coming on board with the proposals.
The authors could have analysed why some landlords do not want to offer longer-term tenancies for example. They might have asked how many properties are secured with mortgages from lenders who will not allow long-term tenancies. They might have described what their recommendations would be for how landlords could evict quickly a non-paying tenant who had been granted a long-term tenancy.
I believe that in essence they are proposing a solution for a non-existent problem; and that this agenda of the need for longer-term tenancies is an ideological aim of Shelter (and coincidentally Shelter’s former Chief Executive has now joined JRF).
A further point they should have stressed in terms of insisting on longer tenancies, is the possibly negative effects of this on the supply of housing. Some accidental landlords, for example, might rent out a house for a year or more (perhaps if they are working abroad or in a different part of the country) if they are sure that they will be able to re-gain control of it when and if they need to sell. One already runs great risks every time one lets a house to a tenant as they may turn ‘rogue’ and wreck your property. There is also the risk of falling foul of the many rules and regulations and be prosecuted even as criminal if you did not realise your tenant was illegally in the country for example; being a landlord is a difficult and risky business and any further hurdles put in the way will only act as further disincentives.
So, if potential landlords are going to be tied into mandatory long-term tenancies they might decide to keep the property empty. How does that help with the housing shortage? How does implementing restrictive policies which deplete the amount of housing available at any one time help with the quest for affordability? The authors acknowledge that there is a problem with lack of supply in Ireland; don’t they consider this might be because of the excessive regulation (Government interference) in Ireland? Instead, they hold Ireland up as a model to emulate.
‘In particular, research by Sherry Fitzgerald, a property advisory firm, advised that over 40,000 units had been lost from the PRS between 2011 and 2015 due to buy-to-let vendors selling properties (Sherry Fitzgerald, 2015).’
The link between the Irish Government’s policies towards the private rented sector and this contraction in supply is clear.
‘This is not to suggest that the PRS in Ireland is necessarily or definitively well regulated or functioning coherently, as there have been a number of criticisms of the sector. Despite the 2004 reforms, the PRS in Ireland has been characterised as ‘a fragmented, under-capitalised ‘‘cottage’’ industry, lacking the professionalism and modern synergy with a strong regulatory framework that prevails in other EU countries’ (Taft, 2009).’
If this is the case, it is hard to see why the authors are holding it up as a model for the UK.
In terms of the remit of the report, it is clearly too limited. For example, because they are only looking at the PRS in both countries, they make no mention of the evidence that tenant satisfaction levels amongst tenants of social landlords is very comparable to those for tenants in private rented housing. Why is there not more focus on the need to improve conditions in social housing? Why was it decided that the authors would only put the spotlight on the private rented sector? Do social tenants not matter? For example:
‘Tenants were asked about their experiences of living in the PRS, including a focus on their housing costs, tenure security and property standards, and their relationships with landlords.’
The partiality of the report in addition to being underlined by the absence of any focus on tenants in social housing is compounded by the almost non-existent landlords’ perspective. Notably, when they obtained their tenant sample, they should have also asked the landlords of the tenants they interviewed what their thoughts were on how things worked. Without this, the accounts of the tenants are unreliable. The sample may also be skewed, moreover, as an unspecified number of the sample came via a housing advice charity (who are more likely to have perceived problems with their housing).
One can take the example of repairs to illustrate this. Whereas a tenant might complain that repairs were not done promptly, had the landlord been asked, they might have said that in fact they were done promptly, but that the tenants’ expectations were too high (maybe they thought a broken boiler should be replaced within 24 hours for instance) and/or they might mention that the tenant was in arrears and/or was even abusive. The issue of mould is mentioned by the authors, but no discussion of the most common cause which is lack of ventilation, made worse if landlords improve homes with better insulation but the tenant does not ventilate. Tenants might also lie or exaggerate. The authors sought no independent corroboration. This wouldn’t be acceptable in a court of law.
The authors also write about the need for landlord education; but what about tenant education?
So, the authors are happy to address the issue of poor housing conditions (which paints landlords in a bad light); but there is no mention of rogue tenants (and the extremely stressful situations often faced by decent landlords).
‘Incentives continue to be important in Ireland, where more advantageous tax relief is available for landlords who let to low-income tenants for a minimum of three years, through the Housing Assistance Payment programme.’
It is my understanding that the levels of ‘housing benefit’ are, however, very low in Ireland and way below market rent, so I don’t see why this model would be attractive to UK landlords at the very point when we have to maximise rents to cover the tax on fictitious profit.
The UK Government’s ‘war on landlords’ should also be seen in this context and it is, I believe, wrong of the authors to not be more explicit that what they call an incentive is, in fact, only the first step in Ireland towards full restoration of landlords’ rights to deduct finance costs to arrive at profit. The Irish Government is restoring the 25% ‘restriction’ of ‘tax relief’ in 5% increments as it has realised this policy exacerbated the housing crisis in Ireland. The full 100% finance costs will then be deductible once more.
‘Low-income tenants often struggle with accessing and keeping tenancies in the private rented sector, suggesting a role for support schemes that work with landlords to help tenants with these issues.’
As an experienced portfolio landlord, I find this a very euphemistic statement. What does it mean that they struggle? I have had people ‘struggle’ in the sense that they have chosen to spend the rent money on drink, drugs, mobile ‘phones, Sky packages, takeaway meals, cigarettes, a summer holiday and so on. In fact, it is then the landlord who struggles – trying to pay the mortgage on the tenants’ home as well as on their own and all of the other associated costs, whenever they find they have a rogue tenant. If JRF wants its research to be seen as credible, it must also present the landlords’ viewpoint. You cannot just look at one side of an equation as the solutions proposed will not then be the correct ones.
The authors also comment on the desirability of limiting the frequency of rent increases, clearly believing that this is another policy which should be considered in England. Government control of rents in the PRS is a populist policy often mooted as a solution to rents rising. In fact, the evidential basis for rent caps having a positive impact is non-existent (Niemitz, 2016) and yet it is still often called for. The opposite approach is suggested by some of the stakeholders in the report:
‘Rent controls were not seen as desirable or important by all stakeholders. Many respondents in different local authority areas, and at a national level, from different sectors, commented on their wariness at dissuading landlords from letting property in an era of low housing supply in some locations.’
Also, instead of thinking that landlords are going to apply in droves to house people on benefits if they are allowed to offset finance costs, they should be put in the picture that many landlords are now moving in the opposite direction, away from this client group. This is not only because Local Housing Allowance is now often way below market rents and because of Section 24, but also because landlords are becoming increasingly sick of being accused of taking (stealing) taxpayers’ money when they house people on benefits. If landlords only house people who pay their rent out of their salaries they do not face this ludicrous accusation (in fact, Housing Benefit is paid to tenants who cannot afford to pay their rent; it is not a ‘subsidy’ to landlords).
‘One way of incentivising registration may be to permit the offset of capital expenditure on improvement works against rental income, helping to tackle concerns that landlords are negatively affected by recent taxation changes.’
No. Sorry. That wouldn’t do it for me. Again, I repeat, the main recommendation should be abolishing Section 24.
The authors recognise the impact of the disallowing of finance costs in Ireland:
‘More stringent taxation and its financial impacts, rather than tenancy registration per se, has been highlighted as a driving force for those landlords that have left the market in Ireland (Irish Examiner, 2016). Forthcoming improvements to Mortgage Interest Tax Relief for buy-to-let landlords may help to reverse this trend.
‘Tenancy registration in Ireland, and landlord licensing in some parts of England, are effective ways of collecting more accurate information about the size, composition and geography of the sector.’
One assumes they see this as important, because academics and researchers like data. I wouldn’t have seen it as a priority though.
‘This may include improved marketing of and support for schemes that seek to support low-income households and landlords with tenancy access and sustainment, such as a national rent deposit guarantee proposed by Crisis and the National Landlords Association.’
No. Sorry. This also won’t do it. An indemnification for all arrears and damages would do it. As any experienced landlord knows, if a rogue tenant decides not to pay the rent, they can get away with at least 5 months’ rent-free accommodation while the case goes through all the legal procedures and at the end they are faced with this massive loss of money through rent arrears and legal costs and also the invariable renovation and clean-up works as tenants who don’t respect their promise to pay the rent often also damage the property. One month’s deposit doesn’t come near to covering this risk.
They ask for support schemes to assist landlords who cater for low-income households. What assessment have they done regarding the impediments to landlords catering for this group? Clearly, Section 24 is a massive impediment, which they do acknowledge, but it is not the only one. Have they calculated, for example, what proportion of the £9 billion or so lost to UK landlords every year because of rent arrears and damage comes from the behaviour of this group? I’m not saying that they are mostly to blame for landlords’ massive financial losses each year – I am saying that the authors should have addressed this question.
There is certainly a perception that it is this group which causes the greatest losses. I think they need to fill in this gap in our current knowledge. One idea would be to at least suggest a facility whereby data were collected on the landlords’ assessment of losses through rent arrears and damages. As I mentioned, even more crucial is to suggest that Government indemnify landlords’ losses if they agree to house people whom they would not normally risk taking on. Why should landlords be asked to take these enormous risks with their assets when only landlords then face the hit of the associated costs? It is very easy to ask other people to take risks that no-one else is willing to take. I doubt very much, however, if landlords will continue to do this. Wherever possible, facing a tax levy on our finance costs (as though they are profit when they are not), landlords are going to go for the safe bet and aim to secure tenants with the greatest means.
‘In both England and Ireland, forms of landlord licensing and tenancy registration were shown to have multiple benefits in improving the circumstances and experiences of tenants in the PRS, and in enhancing market understanding of the sector.’
If the authors had asked landlords in general what they thought about licensing the response would have been very different. In Cardiff, for instance, each licence costs around £600 and each time the council issues or renews a licence I believe they feel they have to justify the fee and the way they do this is by demanding that thousands of pounds worth of work is done – for example replacing original Victorian doors with horrible fire doors which tenants hate and which they jam open as they are sick of them slamming back in their faces. Of course these licence fees are a Godsend to financially-strapped councils and pay the wages of council employees. No conflict of interest there.
There is also a section in the report related to security of tenure where the authors talk a lot about tenants’ rights. They do not talk about landlords’ rights or about tenants’ responsibilities, unfortunately. The difficulties landlords face at the hands of rogue tenants are not considered to be of equal worth to report on in their endeavour to improve how the UK PRS functions.
‘There needs to be greater consideration of how incentives could improve the sector in England, particularly given recent punitive taxation changes that have been unpopular with landlords and could result in disinvestment.’
This would have been better written thus:
‘There needs to be an urgent reversal of Section 24. As Paul Johnson of the Institute of Fiscal Studies has stated, it is ‘plain wrong’ to tax landlords as a business but not allow them to offset the costs of producing that taxable profit. In addition to being unfair, it will be extremely damaging as landlords are very unlikely to take out finance costs to develop the new housing that is urgently needed in the rental sector, when these costs are treated as profit to be taxed. Many will also leave the sector. This bizarre change in accounting rules will cause untold damage to the poorest in society as rents and homelessness levels rise; as they did in Ireland. The Government should completely reverse its approach to the PRS, and recognise it as a hugely valuable resource and as an essential component of housing provision in the UK. The Government should look at introducing incentives, particularly tax incentives such as those which exist in countries such as Germany and it should immediately end its ‘war on landlords.’
In sum, I think this report does not focus on the right issues, even so far as comparing the UK with the wrong country and believing the Irish PRS is more functional than the UK one, when I believe the opposite is the case. It is also too focused on tenants and their perspectives and does not speak out clearly against the main threats facing the PRS and the low-income families within it especially – notably, Section 24, the freezes to LHA and the changes to Universal Credit. So, geographically and substantively I believe the report unfortunately adopted the wrong focus.
I will send this critique to the authors and report any feedback here.
Dr Rosalind Beck
Portfolio landlord and campaigner against Section 24.
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