“No fault” eviction of the PRS
You often hear the use of Section 21 of the 1988 Housing Act described as a “No Fault” eviction, where tenants are evicted from their homes without reason, without being at fault for anything in particular. Many lobbyists, mainly Left Wing, have continually campaigned to have it removed and until about 2015, their cries had fallen on deaf ears, but as I write today, times have been slowly changing as Bob Dylan once crowed, and the government is sleep walking into a disaster that will see these same tenants with far less choice about where they live, in fact many will have no choice, some won’t have a home at all. Strangely, as an industry commentator, like many others, I can see no plausible explanation as to why they are allowing this to happen, albeit they are in fact not walking but accelerating towards the edge of that cliff in a V8 Ford Thunderbird like Thelma and Louise. Before I get to the detail of this impending catastrophe like at the end of that movie, let me first explain how it all started.
The Private Rented Sector was born out of the last housing crisis in the late 80s rolling into the early nineties where there were simply not enough homes for people available who were not themselves homeowners for a variety of reasons, 17% interest rates for one. Assured tenancies were replaced with Assured Shorthold Tenancies, Section 21 of the 1988 Housing Act gave Landlords the ability to take back possession of their properties when they wanted them back. A new industry was born overnight and the Buy to Let boom started culminating in 2019 with 4.7 million properties, or 20% of the housing stock in the UK rented out to tenants who for one reason or another wanted to or needed to rent.
The Government from the mid-90s onwards had effectively been bailed out by about 3.7 million private Landlords who had stuck their neck out and invested in what was to start with an unknown quantity. Tax breaks were offered to Landlords to encourage this continued commitment and by early 2000s, the government and the PRS’ fortunes had become entwined and dependant on each other, a marriage of convenience, but one that worked very well for everyone involved, tenants included, but its’ commercial nature, the marketplace was the key to its’ success and to start with the Government knew to leave the dynamics of that market well alone.
The growth was meteoric. In 2007, 18% of housing stock was Social Housing, compared to 13% in the PRS. In 10 years, Social numbers dropped to 17 % as people exercised their right to buy and the PRS expanded rapidly to the 20% it is today. In context, following the Second World War, the government through local authorities built well over half of all dwellings or Social Housing each year and this trend continued through the 50s, 60s and & 70s as Europe was rebuilt after WW2. In the 1980s the pace slowed as private housebuilders took up some of the slack, and in the 1989 crash it stopped completely, but in a phased entry years before, Housing Associations has been created and were now doing some of this heavy lifting. In spite of this, over this time the population was growing as fast then as it is today, and at the start every year in the last 30, as with 2020, we herald the UK as being in a Housing crisis as if this was somehow breaking news.
Choices of how to live are not complicated in the UK. You buy with a mortgage if you have a deposit and are able to borrow. This accounts for just over 15 million properties. If you are unable to buy you are one of many who are competing for the remaining 8.7 million properties. Four million of those are Social Housing for those people on benefits, and the waiting list is a long one, and quite often claimants have to compromise on the accommodation or location. Other than that, there is then the 4.7 million properties in the PRS. These too are oversubscribed, especially with recent European immigration, but that is why the government has set high targets to build our way out of this current housing crisis, demanding 300,000 New Homes each year. The problem there is that virtually none of these New Homes are going to add to the Social Housing numbers. Historically, local councils would ask for developers as part of the Section 106 Agreement to assign a certain percentage of dwellings on site to be allocated as affordable, but with the 2008 financial crisis, and a lack of central government and private funding, local councils quickly lost sight of this and demanded schools and leisure centres were built instead, creating a 12 year vacuum that was filled by the PRS which has continued up until very recently.
In conjunction, back in about 2013, the chancellor at the time bought himself a government company car, a proverbial 1966 Ford Thunderbird. At the time, I have no doubt that Mr Osbourne didn’t realise the chain of events that his purchase would set off, leading to the number of properties and landlords seven years later in 2020 in the PRS starting to drop for the first time since it started in the 90s. That’s where the sleep walking came in to start with. 18 Housing Ministers in 20 years, doesn’t help, and none of them with a property background, with then successive governments constantly focussed only on winning votes for the next national vote. 2015, 2017 & 2019 General Elections. 2016 Referendum. Council elections every May. A toxic combination for some continuity in Housing policy during this period, but isn’t that why governments have a consultation process to help keep them on the straight and narrow? They do indeed. If it worked.
When the government plans to implement significant legislation especially in an area where there are many conflicting stakeholder interests it is standard practice to launch a consultation for 10 or 12 weeks to garner feedback from those potentially affected, those interested or crucially those that have significant expertise on the matter. It is unusual for all feedback to go unhindered over a number of consultations over a number of years, but that is exactly what has happened with most if not all of government legislation in the Private Rented Sector. The lure of the ballot box and keeping on the Westminster gravy train has always proved too difficult to resist. So, I stick my neck out and say, every consultation has pretty much been ignored. Fact. Why? Because the feedback for the government not to make most of these changes has been compelling, and one thing these guys are not is stupid.
A friend of mine and I swap new articles with each other under the theme of “What did they expect was going to happen?”. It started with seeing news articles that to me just seemed un newsworthy as they were so blindingly obvious as an outcome that I didn’t feel they even needed any column inches in the national press. So, for example, “Lion tamer mauled by his own lion at zoo”. I thought to myself, yep, I could have predicted that might happen, that’s what lions do. There have been 100s since, animals feature quite heavily. Killer whales, King Cobras killing their human trainers, base jumpers slamming into cliffs, you get the idea. I wondered then, did they really consider the risks, do a risk assessment, carry out their own consultation on what the likely outcomes might be? If they did, they would have surely seen that death or permanent disability was quite high up the list? Perhaps not.
So I add to the list the governments dealings in the PRS in recent years, in which the outcomes of their meddling have been so painfully obvious and predictable that I would have loved to have been a fly on the wall when they reviewed the feedback from the consultations each time, but decided to press ahead anyway. So, it started in April 2016 with the additional 3% Stamp Duty Land Tax for additional property purchases. I remember at the time in London, the BTL market was switched off overnight, didn’t do a BTL deal in 2016 after April. “What did they expect was going to happen?” Perhaps just that, no transactions, and this alone was planned to disincentivise landlords from adding to their portfolios, but as more and more changes were made in 2017-2019, didn’t anyone in government around the board table advise a little caution on yet more pressure on landlords. Red tape was another area, albeit nothing compared to the big whammies HMG had up their sleeve to come. Right to Rent, Legionella’s disease, Smoke and Carbon Monoxide, Electrical Inspection Condition Reports (EICR), EPC thresholds, stricter (and unnecessary) licensing requirements for HMOs. Landlords were forced to do far more at their own cost.
Big whammy number 1 was Section 24, a year after the changes to stamp duty in April 2017. Historically landlords have been taxed on their profit which seemed fair to everyone involved. So if the rent was £1000 pcm, and the landlord had service charges to pay, maintenance, insurance, and crucially mortgage payments that added up for example to £600 pcm, then they paid tax at their prevailing rate of income tax on the £400pcm profit, which for most landlords was 40%. They were also allowed to add to that list of costs a 10% wear and tear allowance to take into account that over a number of years, carpets and décor would slowly deteriorate and would at some point need replacing. Section 24 changed all that. It was neatly presented so as not to look like a huge tax hike for landlords but that is exactly what it was. Tax relief on mortgage payments was becoming, over a phased 4-year period, restricted to 20%, so the government wasn’t increasing tax, just decreasing their generous allowances. At the same time the 10% wear and tear allowance was abolished. Section 24 without doubt was and is one of the most controversial and unpopular pieces of legislation introduced by the government in recent years, and one they may have to consider retrospectively changing if they want to avert the looming catastrophe we are heading towards. We will have to see.
Big whammy number 2 was the Tenant Fees Act 2019. Most commentators focus was on how this would affect lettings agents, but it had far reaching consequences not only for landlords but tenants as well that seemed to get less air time, but were at the same time spotted by a great number of us in the industry as hugely problematic. Once again, the government chose not to listen. Wrapped up in the abolition of fees charged to tenants was a new cap on security deposits to 5 weeks, and a ban on charging tenants for any end of tenancy commitments that they normally (and fairly and happily) had paid up to then. So typically, when presented with a professionally cleaned flat on move in, the tenant then paid for a professional clean when they moved out. The landlord paid for the check in, the tenant the check out. From June 2019, the landlord had to pay for it all. Likewise references when a tenant made their initial application were now a Landlord cost, traditionally paid for by the tenants themselves. A capped 5-week security deposit meant that far less dilapidations could be covered. The average rent in the UK is about £900pcm, so a 5-week deposit is £1038. That is now supposed to cover any damage, any rent arrears, any missing items, and now the clean and check out costs. 6 weeks was regarded as too low as it was, and many landlords negotiated 8- and 10-week deposits where there were referencing issues, pets or children for example. As a result, families, tenants with pets, those that don’t pass references with flying colours are now being marginalised by landlords, and landlords’ costs have still increased once again. Robert Jenrick even came out and pleaded with landlords to still take pets, but with no proposal like a pet deposit for example to cover any risk. It fell on deaf ears as you might expect. “What did they expect was going to happen?”.
Big whammy number 3 has been quite recent. The handling of the coronavirus pandemic by government has been poor throughout. Now I know a pandemic is never going to be an easy thing to manage, but I am making reference in context of that, and in context of the fact that the government has supposedly regularly well tested procedures for pandemics, as they do for other national emergencies such as war, flooding or flu. If you have studied politics, you will know a governments number one job, its raison d’etre is to protect the nation and its' citizens. You therefore would have thought that dealing with a pandemic would be very well rehearsed when not only have they happened before with SARS for example, but we have our own little domestic epidemic every winter with flu. I cannot keep up with the number of mixed messages since March about what we should or shouldn’t be doing. Stay in, don’t stay in, wear a mask, don’t wear a mask. Go to work, no, we meant actually stay at home. You have needed a PHD in Mathematics to work out the permutations of which bubble applied to which people in which circumstances in which location on which day, during which activity.
Now when it comes to the PRS, the government has spectacularly hung landlords out to dry once more and as recently again as last Friday which has prompted me to pen this blog. Firstly, there has been no proposal in place as to how contractually obligated tenants and then contractually obligated landlords should pay their rent and mortgages. Instead the government put out some wishy-washy guidance that said talk to each other and by the way landlords you can have a mortgage holiday. Fake news of rent holidays then started circulating and I had a very busy 4 weeks with landlords calling me asking for advice. In the meantime, the government did nothing to quash these rumours and some tenants became opportunistic in not paying their rent.
Secondly, at the same time, only 5 lenders out of 49 came forward and volunteered a mortgage holiday for landlords, but even then, there would be consequences. More additional cost for landlords and a black mark on their credit rating. Mr Jenrick missed that detail out in his briefing. Even so, a mortgage holiday was never going to be a solution for landlords receiving no rent, and it was at this point it occurred to me that the government perhaps didn’t have a clue how the PRS worked. A landlord’s costs are fare greater than a mortgage payment even if they are highly geared; interest rates are at an all-time low. Moreover, many older landlords don’t have mortgages, or very small ones, and use the rent as income to top up their pensions. No thought to these who may have fallen into poverty since March as a result, even when their tenants who may have stopped paying their rent, are getting 80% of their salary paid, and with not going to work, or the gym, or the pub are actually better off than before it all started. As it happens rent arrears are not that great, anecdotally about 5%, but that’s not the point. What support has the government offered these landlords that have been affected?
Thirdly, in conjunction, Courts closed, which to be fair was to be expected, but Section 21 notices were increased from 2 months to 3 months to protect tenants, but without once more publicly considering any potential fall out for landlords. I say publicly, because the government may have considered that fallout behind closed doors, but what matters is what they say and what they do in public. Whilst the rest of the country is now being encouraged to open up and get back to normal, Courts that handle evictions remain closed now, extended last Friday from 23 August to 20 September in yet another government u turn. It is a little perverse that if you are Jonny Depp or Brad Pitt you can still occupy the Courts time whenever you have wanted since March for such important matters such as deformation of character or a spat with your Mrs. If you are a landlord who hasn’t has any rent for six months, you are now being told you have to wait at least another month to file papers, and it will then be at least 9 months, more likely 12 with a socially distanced backlog to get through to get in front of a Magistrate. (Watch how many celebs sue the Daily Star next month and get it dealt with instantly.)
Lastly, the final part of this U-turn also extended the notice under Section 21 to a massive 6 months, if served at a point before next March. Essentially, not only has the government indirectly condoned tenants not paying their rent, they have handcuffed a landlords ability to do anything about it, whilst then what felt like for many sticking 2 fingers up at landlords by warning them that a Capital Gains Tax review was under way ready for delivery in the November budget. No one is now going to be surprised to see CGT go up for landlords to pay off some of the CV19 bill. That however is ironically a final insult too many for many landlords as any changes would take at least 6 months to come into effect, by which time they will have sold and many would have sold before now anyway and this brings me to the point.
Depending on where you get your data, whilst the number or rented homes has increased up until 2019, there are 154,000 fewer landlords than in 2015, a drop of about 5%. That is a powerful number when you consider that at no point in the last 30 years has it dropped at all. Now the really scary thing is the trend and where we will be in 2 years, 3 years, 5 years’ time if the government doesn’t quickly reverse much of what has been dubbed “landlord bashing”.
Anecdotally talking to estate agents, letting agents, landlords, and watching feedback on landlord forums, at no point in my career have I seen or heard of more landlords putting their properties up for sale. Only time will tell exactly how many that will be. Consider this though. Who will buy them? There may be a small number of cash rich landlords who may increase the size of their portfolios, granted, but most will sell to private end using homeowners, after all they do make up 65% of the buying market place, and buyer demand after the lockdown has never been greater. Forget about Brexit and all the crocodile tears from government about the levels of immigration. The UK and Germany have been competing for European migrants to come to their shores for years. More people equals more economic activity and more tax. Yes, it may have to be watered down to appease the right wing Brexit xenophobes, but there will always be more people coming to the UK than leaving, more than enough people along with those already here to hoover up these landlords stock.
The cliff edge the government is driving us over at great pace is the worst housing crisis since WW2. If social housing is not being built to any great degree, and the PRS is to start shrinking at a rapid rate, the % of end users homes increasing, there will not be enough dwellings for those marginalised tenants in society who rely on state support, and the number of those after this pandemic is going to sharply increase. You may recall, social housing currently sits at 4 million homes, woefully short of where it needs to be. Councils and Housing Associations just about manage at the moment by relying heavily on the PRS, but only just. Most councils rent a good proportion of the 4.7 million privately rented properties, by offering landlords guaranteed rents and grants, but it is not something for all landlords. What happens when social housing remains at 4 million and the PRS shrinks to 4 million, then 3.5 million, then 3 million as many are now predicting it will? Where will those 500,000 or 1,000,000 people go and live? Can’t get a mortgage, all social housing is full, all the fewer remaining PRS properties are tenanted.
Being a private landlord has become cost prohibitive. Capital growth is limited and is often offset by making a loss each year, such has been the dramatic impact of section 24, and the re-taxing, and re-taxing of the same cash flow again and again. Tax 1 – Income tax for deposit. Tax 2 – additional Stamp Duty. Tax 3 - Tax on profit. Tax 4 - Section 24 Tax on turnover. Tax 5 – Additional compliance and red tape. Tax 6 – on exit CGT. Where is the incentive to become or remain a private landlord?
The Build to Rent industry may be the solution in time but it is still in its infancy, which is the only explanation that makes any sense as to what the government strategy is. Government doesn’t want 4.5 million unknown private landlords; it is as much hassle for them as it is becoming for those landlords. The government does not even know the address of most of the properties or the identities of many of their owners. Tax and compliance, control essentially is impossible. Get rid of them by making it so unattractive as an investment, and replace them with 20 institutional investors on speed dial who do as they are told, like Legal & General for example, who have been given very attractive Build to Rent tax breaks to build massive blocks of flats that will add huge numbers in urban regeneration areas to the social housing shortfall. Makes a lot of sense on a lot of fronts, however, the government has forgotten how dependent it is on the PRS to provide accommodation for millions of government sponsored tenants. Getting rid of even a small percentage of it could lead to the greatest wave of homelessness the UK has ever seen.
The trouble is the government is at least 10 years too early, perhaps more with their PRS to BTR swap over if that is their plan. Their policies are about to cause the PRS to shrink far quicker than the BTR sector will grow. What happens in between? Sleep walking at a gentle pace over 20 years might have dovetailed the two events with a nice overlap. Jumping in the V8 and hitting the accelerator hard and tire squealing as they have towards the first half of their objective in less than 5 years is only going to lead to a nasty fall off the cliff edge and future governments left with the problem of how to fix it all. Some commentators don’t buy the Build to Rent replacement theory on the basis that it could never replace the PRS entirely and put it down simply to successive governments and ministers being incompetent, chasing the tenant vote which collapsed for the Tories at the 2017 General Election. Likewise, perhaps also lazy, when pressure from Shelter, Generation Rent and others to enact tenant friendly legislation became an unwanted distraction when they had Brexit on the table throughout the whole time and now the pandemic on top which have been far more pressing battles to fight.
A combination of any of these could equally explain it, but either way, it is not too late to change course, but do the government know where they are headed, do they know the dangers they face? Only time will tell before we learn whether the PRS suffers its own “no fault” eviction from the UK. As I saw one landlord post the other day, “Last one out, please close the door”.