Tenants need security of tenure
Matthew Taylor has a thought provoking article in The Times today. He argues that the home ownership ideal that so many Brits aspire to is actually unhealthy for the country and far better would be a balance of about 50% owners and 50% renters.
I agree with Matthew that changing the culture to ensure that renting was a more viable option for people and they did not feel compelled to get on the housing ladder would be better. The problem however can be summed up in three words: "security of tenure". Or indeed lack of it.
I blogged a few months back about how I had been effectively evicted from two of the flats I lived in through no fault of my own. Here are a couple of excerpts from the post:
The worst thing about privately renting in my view is the lack of security of tenure. In two of the places I rented, I was forced to move out on the whim of the landlord. The worst example of this was a lovely flat I lived in where I was very happy. During my time there I got made redundant from my job. Now I work in a highly skilled profession and there was no doubt I would get another decent paying job in a short while (it took me 2 or 3 months in the end - not bad). I wanted everything to be above board and because I would be claiming housing benefit I thought I owed it to the landlord/agency to inform them of this even though I subsequently discovered there was no legal obligation on me to do so. Big mistake. The first thing that happened was the landlord insisted on the next 3 months rent in advance in a lump sum. I could cover this because it amounted to roughly my redundancy payment. However 3 months later the landlord served notice of eviction on me. By this time I had already started my new job at the same salary as I had been on before but they weren't interested. I was out. I loved that flat and would have been very happy to stay there for years, until I had been in a position to buy my own property which was not to happen for another 3 years almost.
I am not an expert on the intricacies of what lie behind the situation around renting in the UK but surely there could be a rebalancing to give a much stronger security of tenure. Some relatives of mine lived in Holland during the 1980s and they still maintain strong links with the country now so I have been over there a number of times over the years. I know people over there find our obsession with purchasing our own homes in this country quite odd. However I knew a woman over there who was in her late 20s with a child and privately rented a beautiful flat with 3 bedrooms in a very nice area and she was paying the equivalent of £150 per month. This was in 1991 so it would obviously be more than that now but the crucial thing for me was when I talked about what her longer term plans were and when she would be looking to buy somewhere. "Why would I want to buy somewhere when I can stay here?" was her response. The situation she was in there of course was that she had security of tenure.
I am afraid unless and until this problem is addressed then private renting will often seem like a staging post until the tenant can buy somewhere.
Posts
10 comments:
But renting is a staging post on the way to buying somewhere.
The reason for this is really simple: when you own a house, you have to pay off your mortgage. When you rent a house, you're rent is paying off someone else's mortgage. After a year of paying off a mortgage you have greater equity, and once the mortgage is paid off you have achieved something. In that sense, a house is an investment. A year's rent is just spent money.
I simply cannot see any reason whatsoever to see rented accommodation as anything other than temporary digs. Renting is like only ever paying off the interest on loans - it works as long as everything stays exactly the same, but (as you found) problems can have massive knock-on effects, and you have nothing to fall back on.
This cultural predisposition to owning your own home seems to be a peculiarly British obsession. I am sure that lack of security of tenure contributes to this.
Home ownership has adverse consequences for the mobility of the workforce as Matthew pointed out (this has been known about for decades) and you only have to look at what has happened to the economy in the last 18 months to see how dangerous it is to have such high levels of home ownership and so many aspiring to it.
It is of course true that when you own a house you are paying off your loan on it and when you rent you are paying someone else's mortgage. However why is this the case? In a lot of areas it can actually be more expensive to pay rent monthly than to pay a mortgage. That's crazy. It should be much, much cheaper to rent than to buy but the market is stacked against it and the landlord holds a lot of the cards. The lack of supply must be a huge factor here.
I am trying to argue from the perspective of how things could be if we had a more sensible balance in this country. My experiences in Holland have always stuck with me because it seemed so eminently sensible how they deal with it over there and I have always wondered why we can't have a better approach in the UK.
There are lots of advantages to renting too, e.g.
1) Flexibility - ability to be able to move at relatively short notice.
2) Not having to worry about shelling out for costly repairs for appliances, roofing repairs etc. They are often/usually the landlord's responsibility.
3) It SHOULD be much cheaper.
4) You are not exposed to the lottery that is the housing market. Lots of people end up losing lots of money when the market goes down if they are unlucky and end up having the house repossessed.
I have also come across this article from a few years ago from The Daily Reckoning which goes into a bit more detail about the UK's obsession with home ownership and also contrasts us with our European brethren.
When you own a home but you've paid for it with a mortgage, you have to pay interest on that mortgage. That interest isn't paying for anything, it's just going to someone else for no reason other than that other person had money and you didn't. So that's no different from paying rent.
Paying rent is not necessarily paying off someone's mortgage, certainly not at the full rate of a current mortgage on the property. If the owner bought the property a long time ago or with cash, it can be rented out for a lot less than the cost of a mortgage and the owner can still make a profit. That's why council house rents can be so low and yet they are not subsidised - the rent is set at the cost of paying whatever loan is left from building them (which is low compared to current costs) and general maintenance. The general supposition that because council house rents are lower than private rents the is some sort of taxpayer subsidy is wrong - by law they must cover their costs, any difference from private rents is because they can't be used to make a profit.
If there were more rented accommodation, costs would come down and people could make a rational choice. It would be cheaper to rent than to buy. Plus if you're a busy person the fact that the landlord takes up responsibility for repairs and maintenance is useful both in time-saving and smoothing out unexpected bills. Plus it is much more flexible to be able drop out and move on quickly if your circumstances change. So more flexibility and more money to invest in other things must surely be good - maybe those other things are building up a business, or some other more socially profitable form of investment.
One of the reasons owner-occupation remains seen as the obviously best financial option when whether that's really so is questionable is folk memories of high inflation in the 1970s and 1980s. When inflation was high, the real value of your mortgage would rapidly dwindle away. So it made financial sense to take on a mortgage too high for you to handle comfortably, knowing that in a couple of years inflation would reduce it to a manageable size. That justification has gone away now inflation is low, but the thinking it led to is still there. High inflation also took away the real horror with the mortgage, the danger of negative equity. The big house price crash of the mid 1970s was disguised because it worked by house prices staying still while everything else rose in price. So no-one was stuck in that horrible situation of losing their job so unable to pay the mortgage, unable to sell in a falling market, unable to pay back the loan if they did sell, and a massive debt rising monthly.
Mark - private tenure in Britain has gone from being too secure to too insecure. One of the places where I think the Thatcher government did get it right was to introduce insecure private tenure. I am old enough to remember the days before that when it was really hard to get a privately rented flat because security of tenure and rent protection rules meant few people were willing to let property. It has made a huge difference to flexibility in life that one can now walk into a letting agent, view loads of flats, make a choice and be in one within days.
Agreed, it would be good to have a half-way option better for the tenant than the current six-months agreement with one month's notice to be out. It may be, however, that a more mature letting market would be willing to make more secure tenure available. The current insecurity is when landlords take maximum advantage of what the law allows. If there's a glut of properties to rent, possibly landlords may discover that agreeing to longer term tenure protection is a good selling point. Does this need to be forced by law?
Look at me - I'm sounding like one of those "libertarians" here.
When you own a home but you've paid for it with a mortgage, you have to pay interest on that mortgage. That interest isn't paying for anything, it's just going to someone else for no reason other than that other person had money and you didn't. So that's no different from paying rent.
Paying rent is not necessarily paying off someone's mortgage, certainly not at the full rate of a current mortgage on the property. If the owner bought the property a long time ago or with cash, it can be rented out for a lot less than the cost of a mortgage and the owner can still make a profit. That's why council house rents can be so low and yet they are not subsidised - the rent is set at the cost of paying whatever loan is left from building them (which is low compared to current costs) and general maintenance. The general supposition that because council house rents are lower than private rents the is some sort of taxpayer subsidy is wrong - by law they must cover their costs, any difference from private rents is because they can't be used to make a profit.
If there were more rented accommodation, costs would come down and people could make a rational choice. It would be cheaper to rent than to buy. Plus if you're a busy person the fact that the landlord takes up responsibility for repairs and maintenance is useful both in time-saving and smoothing out unexpected bills. Plus it is much more flexible to be able drop out and move on quickly if your circumstances change. So more flexibility and more money to invest in other things must surely be good - maybe those other things are building up a business, or some other more socially profitable form of investment.
One of the reasons owner-occupation remains seen as the obviously best financial option when whether that's really so is questionable is folk memories of high inflation in the 1970s and 1980s. When inflation was high, the real value of your mortgage would rapidly dwindle away. So it made financial sense to take on a mortgage too high for you to handle comfortably, knowing that in a couple of years inflation would reduce it to a manageable size. That justification has gone away now inflation is low, but the thinking it led to is still there. High inflation also took away the real horror with the mortgage, the danger of negative equity. The big house price crash of the mid 1970s was disguised because it worked by house prices staying still while everything else rose in price. So no-one was stuck in that horrible situation of losing their job so unable to pay the mortgage, unable to sell in a falling market, unable to pay back the loan if they did sell, and a massive debt rising monthly.
Mark - private tenure in Britain has gone from being too secure to too insecure. One of the places where I think the Thatcher government did get it right was to introduce insecure private tenure. I am old enough to remember the days before that when it was really hard to get a privately rented flat because security of tenure and rent protection rules meant few people were willing to let property. It has made a huge difference to flexibility in life that one can now walk into a letting agent, view loads of flats, make a choice and be in one within days.
Agreed, it would be good to have a half-way option better for the tenant than the current six-months agreement with one month's notice to be out. It may be, however, that a more mature letting market would be willing to make more secure tenure available. The current insecurity is when landlords take maximum advantage of what the law allows. If there's a glut of properties to rent, possibly landlords may discover that agreeing to longer term tenure protection is a good selling point. Does this need to be forced by law?
Look at me - I'm sounding like one of those "libertarians" here.
Unusually it looks as though I’m agreeing with Matthew. With my private landlord hat on Mark I think you've both been unlucky and have some misconceptions about how the private rented sector works.
When you were renting and were made redundant your landlord had no right to demand 3 months rent up front, unless you had some peculiar relationship with them that wasn't covered by a proper contract. Even then their behaviour was probably illegal.
Most rental agreements are covered by standard assured short-hold tenancy agreements that protect both you and the landlord. Even without one you have legal protection from unreasonable demands.
Once in situ the law is heavily weighted in favour of the tenant and maintaining residency.
If you had reached the end of your tenancy agreement, your landlord is perfectly entitled to give notice and start proceedings for possession. If you ignore that as a tenant you can be evicted using the courts. This can take months. But the landlord cannot just boot you out on the grounds you don't have a job.
If you had not reached the end of your agreement they would have had to have had grounds under schedule 2 of the 1988 Housing Act. These are fairly extreme grounds and as you had consistently paid the rent I doubt they could have done that unless you were a truly dreadful tenant in other ways. You could have contested your landlord’s behaviour.
"It is of course true that when you own a house you are paying off your loan on it and when you rent you are paying someone else's mortgage. However why is this the case?"
This is something of a misconception. Private letting is a business where the price or rent is set by supply and demand not the mortgage. The bulk of the private rented sector are either professional property management companies or private individuals both of whom operate on very tight single-figure margins. To become a private landlord for example you must switch from a regular to buy-to-let mortgage. Rates on buy-to-let mortgages are some 2-3% higher than regular mortgages and to secure one you often need a loan to value ratio of around 60-75%, and the mortgage company must be satisfied that the market rent on the property can cover 130% of the mortgage to agree to lend.
Many buy-to-let landlords bought into this during the housing boom on the grounds that the loan would be paid off by capital appreciation. Now the housing market has crashed many landlords will be forced to sell as they can’t get new buy-to-lets on the 130% rule.
If you understand that context you'll understand why landlords outside the social sector are so terrified of unemployed tenants. The cost of getting rid of someone not paying rent can amount to thousands, take months, and if they're genuinely skint you have no prospect of recouping your losses.
Meanwhile you’re still paying the bank every month on the mortgage loan. Rental protection insurance mitigates against this but it is extremely expensive and only really affordable to landlords who don’t need it.
So on your general point about secure tenancy. Private tenants already have quite a degree of security, there are very few loopholes left in the law where you can just be thrown out on the street due to adverse personal circumstances. Bank repossession is one where I believe we're working to change the law.
Actual secure tenancy, where you have residency rights for life regardless of circumstance, is arguably an extremely bad idea both in the private and social sectors.
In the social sector it means granny-squatting and an undersupply of homes for families and those starting out in life. It means people like Piers Corbyn who is a multi-millionaire can choose to occupy a council flat, and Baroness Uddin can stay in her social tenancy regardless of need.
In the private sector it would put a duty to house a tenant, and the cost of that duty, on the landlord. That would clearly require a large social insurance pot as individual landlords couldn’t afford to do it, and private insurance is already largely unaffordable.
If what you mean by secure tenancy though is protection from homelessness that's slightly different. That's clearly a social right and one that is a duty on the government. Such a duty though must be affordable.
While it's an attractive idea that the state could intervene to protect a tenant in a private tenancy for a number of months while they sorted themselves out, and certainly one that for short periods would be less expensive than dealing with the many social costs of eviction and homelessness, it cannot be a blank cheque forever, such a system would be wasteful and invite fraud.
So in summary I'm not sure the balance isn't about right now, and your view may be being coloured by a particularly unfortunate personal experience where you may not have realised how protected you actually were.
I'm old enough to remember the Rent Act that used to cover rented accommodation up until the Tories introduced Assured Shorthold Tenancies. Renting out property was a nightmare then. Once a tenant moved in, that was it. Total security of tenure. Even if they didn't pay the rent it was very hard to regain possession of your property. The level of rent was controlled, and you couldn't charge more than a 'fair rent' which would be assessed by the local Rent Officer. Also you couldn't raise the rent by more than 5 or 10% at anyone time. So in the 70s when prices were going up in double digits, it was impossible to keep up. You ended up with property that cost you money as a landlord, because the rent was so low it wouldn't cover the cost of repairs etc.
The overall effect was to reduce the amount of housing available for rent, because if a landlord finally got possession (death of tenant, or they moved out voluntarily) the most likely thing to do was sell the house and invest the money elsewhere where a better income could be found.
Assured Shorthold Tenancies have ensured that there is plentiful supply of rented accommodation, which keeps rents down. In the absence of rent controls, changing the law to give tenants more security would mean landlords would seek more rent to compensate for the inability to regain possession.
Andy
If you understand that context you'll understand why landlords outside the social sector are so terrified of unemployed tenants. The cost of getting rid of someone not paying rent can amount to thousands, take months, and if they're genuinely skint you have no prospect of recouping your losses.
If tenants on housing benefits are in arrears, the rent had to be paid direct by the authority to the landlord. Thus, far from being terrifying prospects, unemployed tenants are good cash cows. When we had council housing, housing benefit only paid costs, now it pays huge amounts more straight from us the taxpayers into the private landlord's bank account.
So, the right-to-buy contributes greatly to why we seem to be paying more tax but getting nothing in return.
Thanks for all the really detailed and informative comments so far.
There are obviously people here who know more about the intricacies of this than I do and I would just like to ask one thing.
How do the European countries who seem to manage to have a much better renting situation (cheaper, security of tenure etc.) over there do it?
Security of tenure is something I would really appreciate: my previous two homes were sold by their landlords after 3 and 1 year of tenancy respectively - I had no choice but to move home on each occasion.
I would in fact like to buy a home, but that's mainly because I would like to stay in it! Why don't I buy? Because first I have to save up a massive deposit (as current mortgage market demands). This would be easier if my rent were cheaper, but of course it's expensive.
It seems this country is now trapping would-be first-time buyers in expensive rented accommodation whilst also failing to enforce any meaningful security of tenure beyond a typical maximum of one year's assured shorthold tenancy. I'm surprised security of tenure is not much higher on the political agenda: it would get my vote!
Post a Comment