The Scottish Reforms in an International Context

Transcription

1 The Scottish Reforms in an International Context Christine Whitehead Professor Emeritus in Housing Economics London School of Economics Shelter Private Rented Conference Edinburgh 25 th October 2017

2 Growth and change in the PRS Evolution 100 years of decline before turnaround in mid-1990s driven by Deregulation, but especially Buy to Let mortgages at low rates based on security of rental stream. Drivers Supply: mainly units transferred from owner occupation or Right to Buy Demand: increase in natural market for PRS + difficulty accessing owner occupation Forecast: continued further growth

3 Some Numbers (000s) Housing Stock Owneroccupation PRS Social Housing Total Stock , , Change % change + 0.8% +122% - 14% 10% % of stock 2015 % of stock % 16% 23% 100% 31% 10% 54% 100%

4 The PRS Today: Tenants Highest proportions in central cities; Tenants more likely to be young, working, mobile/migrants; Increasing numbers of families and longer-term tenants; About 20% receive housing benefit a considerably lower proportion than in England.

5 The PRS Today: Landlords Most landlords are private individuals; Most are amateur landlords and hold only a small number of units - but by definition far more households now own 2 or more properties; Data on landlords and their financing are poor; An important objective of many investors is to contribute to their pension; Different types of landlord face different tax regimes important changes reducing incentives for Buy to Let individual landlords.

6 Income-related housing subsidies Stick in a couple of graphs

7 Rent Control: History and Aspiration History of rent control over long term very negative - led to under-occupation; poor repair and maintenance; transfer of units to other tenures; avoidance/evasion; exclusion of new households; But does it have to be like that? More sophisticated methods of stabilising rents and generating greater predictability; Many European countries have forms of rent stabilisation; But also different forms of security of tenure and different products on offer; And often different economic environments.

8 The evolution of rent regulation First generation Control of rent levels ( rent freezes ). Incentives for landlords to leave the sector and under-maintain remaining properties. Second generation Control of rent increases within and between tenancies. Still generates disinvestment when rises allowed are below market. Third generation Control of rent increases based on defined index within tenancies, but not for new tenancies. Most market-friendly.

9 Relationship between stabilised and market rents

10 International experience: Rent regulation Country Rent regulation on first renting on new tenant of rent rises on existing leases Switzerland Y Y Y Germany Sometimes Sometimes Y Netherlands Most Most Y Spain N Y Y Belgium N N Y Finland N N Y France N N Y Norway N N Y Sweden Rents based on rents for similar units owned by MHCs Australia N N N USA* N N N England N** N N

11 International experience: Leases Country Typical lease period Security beyond lease period Germany Indefinite High Sweden Indefinite High Switzerland Indefinite High Netherlands Indefinite High Spain 5 years Low Norway 3 years or indefinite Low France 3 years Medium Belgium 1-3 years Low Finland One year Medium USA 1 year Low Australia 6 months Low England 1 year Low

12 The German model Tenants get indefinite leases; Landlords can evict only for reasons set out in the law; notice period 3 9 months depending on how long tenancy has lasted; If the landlord sells, the lease binds the new owner; Initial rent can be freely set, but not more than 20-50% above average rents in the local area now further constrained in high demand areas; Rent can go up every 15 months usually by average in the area; But historically falling house prices and low inflation and product very different from the UK; Growing pressures in Berlin, Munich and other buoyant growing cities; And pressures for more control including rent freezes.

13 Where Does Scotland Lie? The new tenancy: indefinite tenure (no probationary period) with tenants right to leave at 28 days notice; Tenancy can be inherited by a partner, a family member or a carer; Security is subject to 18 reasons for eviction including mandatory eviction if landlord intends to sell on the market (enabling vacant possession price) Others reasons around refurbishment; change of use; family accommodation; and varying breaches of tenancy contract or law. Actual rent control is strongly market based. Agreed rent at the beginning of the tenancy. Thereafter the landlord can increase to market every year with possible reference to the rent officer to ensure rent no higher than current market rent So system more about security than rent control? Local authorities may apply to the Ministers to identify rent pressure zones where they can restrict rent increases by CPI+1+X where X is defined by the Minister. Also some capacity to increase rents in response to improvements. Other changes affecting agents; homes in multiple occupation; tax rates.

14 Issues from Landlords Perspective Multiple complications: agents fees; homes in multiple occupation; security of tenure; rents; But also changes in mortgage tax relief and land and buildings transactions tax on second homes and buy to let; Incentive to leave the PRS market depends on strength of the owner-occupied market and returns on alternative investments as well as changes in the PRS market; Institutional investors which the government wants to encourage, look for stable, inflation adjusted net rental returns and a stable regulatory regime; So, concerns around potential additional changes (as has been the case in parts of Germany); Complexity/uncertainty thus more important than actual changes which have the potential to help stabilise the market; Importantly most landlords are fairly new higher possibility of exit if they become concerned that controls will be strengthened.

15 What do we know? Regulation not always good for tenants/bad for landlords: Can address market failures for both tenants and landlords, while reducing risks for both Can give landlords more consistent rent rises, reducing financing costs, but tenants may pay for certainty Or can restrict returns to landlords leading to reductions in supply and making access more difficult for tenants Depends on the detail and the institutional and market environment Rent stabilisation is only one part of the story Stabilisation does not benefit either all landlords or all tenants Certainty about the regulatory framework is very important to both landlords and financiers A lot therefore depends on how the new regime works early on; International comparisons simply do not start from same point and major problems of perception.