Policy makers have generally done little to alleviate that pressure. However, Chancellor of the Exchequer Jeremy Hunt may have made things a good deal worse in his Autumn Statement earlier this month. In making a great play that social-housing rent increases would be capped at 7% next year, he reminded everyone that, unlike in the private rental sector, annual rent increases are the norm for social housing tenants.
Ordinarily, social rents rise by the previous September’s CPI reading plus one percentage point. Under that CPI+1% formula, social rents were scheduled to rise by 11.1% from next April. For all its faults, the private sector is less formulaic and rents tend to rise more slowly. According to the Office for National Statistics, private-sector rents have risen by “just” 3.8% in the year to October.
This may appear at odds with the terrible stories over the summer of new tenants facing substantial rent increases. That’s because existing tenants tend to fare a lot better. A government survey published in May indicated that only 26% of existing tenancies experienced rent increases in 2021, whereas 64% of rents remained unchanged and 4% fell. (It would seem that the remaining 6% involved “no recorded response” or “don’t know.”)
Up until now, most landlords have been content to keep good tenants happy by not rocking the boat and risking a costly void. An empty property means not only receiving no rent, but also becoming liable for council tax and utility bills. Added to that is the uncertainty around a new tenant. This is why rents tend to be reset to market levels only once someone moves out.
However, as landlords’ costs rise (and typical mortgage rates have tripled this year), they are less able to absorb cost increases for existing tenants. And Hunt’s perhaps inadvertent politicization of rents provides a convenient benchmark and precedent. If a 7% rent increase is deemed “acceptable” in the subsidized social sector, squeezed private landlords are less likely to refrain from increasing their rents.
Yet the pressure on rents is not merely a matter of cost. The latest tax figures from HMRC suggest that 50,000 landlords have left the private rented sector since 2019. This correlates with a 34% jump in capital gains tax receipts in the 2021-2022 tax year over the previous year as landlords sold up.
More recently, rising mortgage costs appear to be discouraging many existing renters from seeking to own a home of their own. A survey conducted for the insurance company Aviva indicates that as many as a million potential buyers under 45 have ruled themselves out of the first-time buyer market. They will largely occupy the properties that younger renters would be looking for.
Given the complexity of the situation, involving both cost pressures and supply constraints, there are no quick or easy fixes. Yet the relative stickiness of private-sector rents for existing tenants points to measures that could be taken to ease the strain.
It used to be the case that mortgage lenders specifically prohibited tenancy agreements of greater than 12 months. However, in 2016 Shelter reported that lenders were beginning to ease that restriction and some had removed it altogether. Unfortunately, tenancy agreements have been slower to respond and still typically have six or 12 months as the standard term.
Making longer-term tenancies the norm would not only provide fewer opportunities to increase rents, it would also bring greater protection against no-fault evictions. With many potential first-time buyers resigning themselves to renting indefinitely, a long-term tenancy might at least mitigate some of the cost pressures.
Landlords in turn would be more likely to commit to the market for longer if the capital gains tax regime were tweaked to promote long-term investment. Since the 2008 budget, capital gains have been taxed with no allowance for intervening inflation. This means that a long-term investment is taxed just as heavily as a short-term speculative gain, even though much of the former is likely to have arisen purely from general inflation. This has encouraged a short-term approach to investment.
Differentiating between short- and long-term gains would greatly reduce the incentive for landlords to cash out every time property prices experience a short-term, cyclical rise. Tweaking taxation to reward long-term landlord commitment over short-term speculation would help ease some of the supply pressure.
Playing politics in the rental market will only make things worse. If the chancellor wanted to set an example for private-sector rents, he should have frozen social rents altogether. As he is likely to find to his and tenants’ cost, you can’t simply mandate stability.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stuart Trow is co-host of “Money, Money, Money” on Switch Radio and author of “The Bluffer’s Guide to Economics.” Previously, he was a strategist at the European Bank for Reconstruction and Development.
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