Rent Controls and the Olympic levels of ideologically inspired cognitive dissonance?

Jeremy Corbyn is now, thankfully, a complete irrelevance. I’ll never forget how happy I was when he lost the election, he represented an existential threat. But his simplistic economic views are still attractive to many. It’s populism at its worst, exploiting a problem, rather than providing a solution for the cause.

It’s either deceit or stupidity. Because I don’t think he’s an insincere man, I’d suggest the latter. He’s an idiot.

Corbyn: “There’s nothing wrong with rent controls“, it seems to me a reasonable way of preventing excessive profits being made in the private rented sector and exploiting people who are in desperate housing need.”

Trite left-wing cliches and sweeping generalisations. How is he defining excessive profits? How does he know what profits landlords are making? Did he think to ask why rents are high? Of course not.

The price of rent is the result of supply (currently low), demand (currently high) and costs (currently excessive). As far as profit, there are good and bad years. On the rare occasions I’ve seen higher profits, it has been to balance previous years of lower profits. It’s a dynamic system that reacts quickly. When profits are low, businesses struggle, sell up or go bankrupt. When profits are high, businesses invest and grow. The former is happening now, not the latter.

Small landlord businesses are finding it extremely hard to exist. Unlike Corbyn, they’re actually doing something to prevent homelessness, not just talking about it, and they’re doing so in incredibly hard circumstances with no support or appreciation. By advocating rent controls, Corbyn is indirectly suggesting this already struggling sector should do the job for free, or even at a loss, which is already happening.

It’s not the role of a private business to subsidise people on low income, that’s the job of the welfare sector. It’s the responsibility of the government. But it’s also worth pointing out renters are not universally a poor underclass. I have tenants on 6-figure salaries and the majority spent less than 30% of their salary in rent.

Back to ‘excessive profits’, how much profit is there for a small landlord business?

TYPICAL EXAMPLE:

2-bed house @ £140k

Investment:
Deposit (25%) £35k
Stamp duty £7k
Loan costs £7k
Purchase costs/fees £1.5k
TOTAL CAPITAL INVESTMENT £50.5k

Rent £800 (7% yield)
Loan £105,000

Mortgage (interest only) £440
Maintenance £100
Management/letting £100
Insurance £25
Certificates £15
Miscellaneous/contingency £50

Total costs £730

Profit £70
Income tax @ 40% £28
Net profit £42

Section 24 tax £88 (£110 @45% tax)
Total -£46 (-£68) per month

How much profit? Often none.

In the example above, a typical business model, around -£50 a month or -£600 a year. A loss. At the same time, the government makes around £100 a month with Section 24 tax (that’s on top of income tax) or £1,200 a year. In practice, S24 is somewhere between tax on turnover for the landlord and VAT on rent for the tenant. None of this is a secret. Anyone can spend 30 minutes researching the sector and work this out for themselves.

For a small business, as things stand, it is barely sustainable. Landlords are selling up, estate agents report a rise from 16% to 35% in sales from the sector. This reduces rental stock, which is failing to keep up with demand and driving up rent. The poorest renters suffer the most. ‘People who are in desperate housing need’, as Corbyn puts it, are pushed out of the bottom of the sector, some into emergency housing, and an increasing number onto the streets. The sale of rental stock reduces overall housing stock as the buyers’ market reaches saturation with less need for new build, which continually misses its annual target.

(As an aside, it’s effectively Labour and Tory policy to close down small landlord businesses and have big corporations to take over – so far, unsuccessfully – but that’s a conversation for a different time.)

While Corbyn would be the first to back a minimum wage, he has Olympic levels of ideologically inspired cognitive dissonance when it comes to private businesses covering their costs. Why would anyone invest in a sector where they don’t get paid a wage and lose money? No one in the public sector works for free, but private landlords are apparently expected to.

However, landlords still make a profit from the capital gain, right? I’m forgetting that.

Although the day-to-day business loses money, the capital investment grows – in theory, a return similar to an ISA. In theory. But on a recent valuation, I got £155k on a property that was valued at £170k 18 years ago – a £15,000 loss – and I’d spend £40,000 doing up. Last year, I lost £30,000 on a bad tenancy (I’ve lost smaller amounts on others). I’ve lost thousands through cladding issues. I own property that’s still in negative equity from the 2008 crash. So there are no guarantees and profit is likely to be significantly less than expected, particularly when you factor in capital costs and capital gains tax.

Like all populists, Corbyn offers no solution, only a fantasy – pricing rent at what he thinks it should be over what it actually is and expecting that to work. The costs involved don’t change. It’s like trying to lose weight by adjusting the scales. The corollary for tenants is higher rents for new tenants, evictions as landlords have to sell or go bankrupt, declining rental stock and less investment.

What use is rent control if there isn’t any property to rent?

Andrew