POLICY BRIEFING The Private Rented Sector: Communities and Local Government Select Committee

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1 The Private Rented Sector: Communities and Local Government Select Committee 15 August 2013 Mark Upton, LGIU Associate Summary The House of Commons Communities and Local Government Select Committee ( the Committee) has published its report of its inquiry into the private housing rented sector ( The Private Rented Sector ). The market has seen sustained and consistent growth in recent years, but needs help to reach maturity. This requires a careful balancing act and action across a number of different areas, not to upset the market developing naturally. Councils need to be given the flexibility they require to enforce the law and raise standards. While letting agents should be subject to the same controls as their counterparts in the sales sector. If standards in the sector are to be raised and pressure on rents reduced the Government needs to increase supply across all tenures of housing. While the benefits of its support for higher-end build-to-let developments needs to be extended across the sector as a whole. This briefing will be of interest to cabinet portfolio members and senior officers with responsibilities for housing and regeneration in all tiers of local government. Briefing in full The House of Commons Communities and Local Government Select Committee ( the Committee) has published its report of its inquiry into the private housing rented sector ( The Private Rented Sector ). The inquiry was conducted against the backdrop of steady growth in the sector. In 1999, 9.9% of English households rented privately; by 2012 that figure had risen to 17.4% with the number of households renting privately overtaking the number in the social rented sector. This trend in tenure predates the 2008 financial crisis; with the Committee believing that we may be looking at a long-term market structural change with a permanent shift towards private renting. The sector is now increasingly

2 catering for people looking for housing for the long-term, including a growing number of families with children. Nonetheless the Committee believes that the UK private market still to be relatively immature when compared to other countries such as Germany. They concluded that there are dangers in interfering too much in a market that is still changing and yet to settle down stressing that it is more important to find ways to bring the market to maturity and encourage it to grow. Raising awareness, maturing the market The Committee believes that if the private rented market is to become more mature, it is important that all parties tenants, landlords and agents - are aware of their respective rights and responsibilities. The first step towards this is a clear and easyto-understand regulatory framework including a standard plain language tenancy agreement. The Housing Minister indicated a willingness to consider a review of the legislation on tenancy agreements. In the same vein the Committee felt that while the housing health and safety rating system may well be a robust tool to enable local authorities to assess such risks within properties, very few landlords (and by implication tenants) understand how it works or even know of its existence. They were also told that it was inconsistent with building regulations and over complex. There were calls from some witnesses to the inquiry for a new approach although views varied as to what form this should take. Some suggested applying the social housing decent homes standard or establishing a variant, with the Committee concluding that it was important that there is a straightforward way of assessing whether the standard has been met or not. The Committee believed that accreditation schemes play an important role in increasing awareness around rights and responsibilities but noted that most landlords are not part of such a scheme. Other mechanisms to achieve the same ends put to the Committee included adopting practices in Scotland where all tenants are issued with a tenancy information pack, and a Government publicity campaign. The Housing Minister, Mark Prisk said he would be happy to support an industry-led scheme, though the Committee observed that it may be difficult to identify a single sector body to make this happen, without Government support. Raising standards of property and management The Committee received mixed evidence about whether or not physical standards and the way in which landlords carry out their responsibilities had improved in recent years. Local authority enforcement A number of witnesses told the Committee that while local authorities had the powers they needed to deal with unscrupulous landlords these powers were not used effectively. Shelter found that just 487 landlords in England were prosecuted last year out of an estimated 1.2 million landlords.

3 They were also told that many local authorities were under-using their powers of prosecution in relation to illegal eviction but the Committee were not convinced that imposing a statutory duty on local authorities was the way forward. However they were concerned to learn that in some instances the police wrongly consider illegal conviction as a purely civil matter, not a criminal offence. While the Committee found examples of good practice they were told that local authorities were inconsistent in their approach to enforcement with the LGIU believing that there is scope for more coordination with regard to sharing learning. At the same time the LGIU found from its survey of local government that a lack of resource as the biggest barrier to greater engagement with the PRS and subsequent improvement in quality. The Committee considered that where possible, the burden of regulation should be placed on those landlords who flout their responsibilities seeing merit in a system which allows local authorities to impose penalty charges. This would have the benefit of achieving improvement while generating resources to fund wider work to raise standards in the sector. But while the Committee was certainly interested in the idea of making the payment of housing benefit conditional upon landlords meeting certain standards, they concluded that it would be complicated to administer and could unfairly penalise tenants (who would remain legally liable for the contractual rent). Nonetheless where housing benefit has been paid, and a landlord is found to have let substandard property, the Committee still believe that the local authority should be able to recoup it. Licensing, registration or accreditation The 2008 Government-commissioned Rugg Review of the sector recommended light touch licensing and effective redress. While some witnesses were supported of this proposal this was not universal and the Government does not favour a national licensing scheme. Nonetheless the Committee felt the idea had some merit and could bring a number of benefits if introduced alongside an effective system of redress. But they had sympathy with the Government s position that a national scheme could be very rigid and while local schemes bring their own costs, on balance they believe that the focus should be on giving local authorities greater flexibility and encouraging the use of existing (local) powers. In terms of that extra flexibility, the Government had in 2010 provided a general consent enabling local authorities to introduce selective licensing without first seeking approval from Whitehall. The Committee felt the Government should go further by giving local authorities greater discretion over when selective licensing can be introduced (e.g. to tackle housing standards) but warned councils that they should ensure that the cost of a licence is not set so high as to discourage investment in the sector. Members of landlord accreditation schemes (those run by local authorities and those run by landlords association) spoke positively of the benefits they offer, though they tended to attract landlords who are already maintaining a good standard of accommodation and management. The Committee therefore accepted that there

4 may be a case in some areas for local authorities to require landlords to be members. The Committee learnt about neighbourhood approaches, such as in Leeds, where the City Council on a street by street basis and by addressing the area as a whole is not only targeting standards in the private rented sector but also empty homes. This involves the inspection of all privately rented properties in an area to ensure they meet minimum standards as well as the provision of help and advice. Targeting a single or four or five streets over a six to nine month period rather than running a licensing scheme for up to five years was seen as a more flexible approach. Letting agents Regulation of agents A number of witnesses considered the regulatory framework covering letting agents to be inadequate giving rise to bad practice with concerns over mishandling of deposits, aggressive sales tactics, misleading adverts, opaque and variable fees and the letting of properties in poor condition. Initially the Government was of the view that regulation was not required as it would be burdensome and increase costs for both tenants and landlords. But they had changed their minds amending the Enterprise and Regulatory Reform Bill to provide for secondary legislation requiring letting agents to belong to an approved redress scheme. This will be underpinned by a code of practice. The Committee believe that the code needs to clearly set out the standards to which agents are required to comply with penalties for those agents who fail to do so. But while the Committee welcomed the Government s proposals it believed that there was widespread recognition that much more was needed. Notably they agreed with the RICS that there is a strong case for a single regulatory framework covering all agents, be they involved in lettings, management or sales by placing letting and management agents under the same regulation that currently govern sales/estate agents. This includes giving the Office of Fair Trading the power to ban agents who act improperly. Agent s fees and charges The largest area of complaint about agents (to Consumer Direct) concerned their fees both the amount charged and the lack of transparency. These mainly related to drip-charging charges which are revealed gradually to the prospective tenants. While the fees charged for referencing, inventories and contract renewal were not considered to be commensurate with costs and there was evidence of double charging (of both landlords and the tenants). Opaque charging was a wider problem and not confined to a small number of rogue agents and according to the Committee appears to extend to some of the leading high street firms.

5 The Committee was not convinced by the explanations it was given by those representing agents that publishing such fees was difficult, recommending that the proposed code of practice included a requirement that agents publish a full breakdown of fees. Tenants and rents The Committee was told that there was a case for longer tenancies and greater security of tenure in some circumstances. According to Shelter renters are eleven times more likely to have moved house than people with a mortgage, telling the Committee that moving house this frequently is not only expensive but can have a negative impact on children s education and well-being. In Germany there is greater security of tenure with tenancies generally being indefinite and tenants having strong protection against eviction. A number of those representing landlords and agents pointed out that the assured shorthold tenancy, which has become the norm in the sector, already offered flexibility. There was they said a lack of understanding about what can be achieved. While initial tenancies might only be for six months or a year, in practice tenants would often stay in a property for much longer. Mark Prisk told the Committee that half of tenants were over two years in tenancy, and in fact about 19% are over five years. While Richard Lambert, Chief Executive Officer of the NLA said there was a distinction between the term of a tenancy and the duration of a tenancy. None the less Dr Julie Rugg (Centre for Housing Policy at the University of York) found the market immature in getting a good link between what people want and what the market is supplying. She suggested that we could maybe start encouraging landlords who want long-term tenants to gather together, and let them badge themselves slightly differently from landlords who really only want short-term tenants. The Committee believes that given the increasing number of families with children privately renting, the sector could no longer be seen as a tenure mainly for those seeking short-term, flexible forms of housing. The market had to be more flexible and the flexibility of the assured short hold tenancies should be better exploited, alongside assured tenancies. They therefore rejected the need for further legislation, pointing to developments already in the pipeline, but believed a number of barriers needed to be addressed. Landlords would need confidence, for example, that they can gain possession quickly if they wish to evict tenants who do not pay the rent or if they wish to sell their property. Some mortgage lenders also insist on shorter tenancy agreements as they were concerned about the ability to gain vacant possession if the landlord gets into trouble; though the Committee was told that lenders are considering how such conditions can be removed. They were also told that it was very much in the interests of letting agents to retain the current short term arrangements as their income is largely derived from finding new tenants and charging for renewals. Consequently they rarely discuss the possibility of longer fixed-term tenancies with their client or with potential tenants.

6 Affordability While concerns were raised about rising rents, the Committee was told that rent increases in many parts of the country were below inflation and that the yields landlords received were stable - approximately 6% since Q Nonetheless there were some calls for rent control or capping rents below market levels, but the Committee was told by others that this would adversely affect investment in the sector and consequently lead to a reduction in supply. For this reason the Committee did not support rents controls believing that the most effective way to make rents more affordable would be to increase supply particularly in those areas where demand is highest. A number of witnesses discussed with the Committee ways in which rent stability could be achieved through longer-term tenancies. Shelter advocated indexation which they believe will increase landlords returns by making increases more steady and predictable. But the British Property Federation rejected this, pointing out that recent history showed that index linking is neither stable nor predictable. They offered alternatives but warned that there was no perfect way. For instance, setting a fixed uplift represents a gamble for landlords about what is going to happen in the wider economy. However the Committee saw that linking increases to inflation or average earnings or using a fixed uplift merit consideration and would provide tenants and landlords with a degree of stability. Increasing supply While it was not the Committee s intention to focus on housing supply a number of witnesses told them that increasing supply was an important way to raise standards and tackle issues of affordability. The Committee observed that the private rented sector has not played a major role in increasing the supply of new housing. While the Government s efforts on increasing the potential for institutional investment in new large scale developments of market rented housing was focused on the higher end of the market, leading the Committee to conclude that the impact of institutional investment in new supply on other parts of the private rented market relies on a trickle-down effect. The evidence presented on the Government s Build to Rent fund (which will provide 1 billion of equity finance to the sector) was that it would speed up existing developments rather than lead to significant additional homes being built. While the Committee concluded that it was too early to judge the impact of the 10 billion private rented sector debt guarantee scheme on delivering additional new homes. Neil Hadden of Genesis Housing Association said that the guarantees would not necessarily affect his commercial investment decisions because his Association can borrow money quite cheaply anyway; while it was reported in the press (in June 2013) that no private company had formally expressed an interest in the scheme.

7 Recommendations Simplifying regulation A wide-ranging review to consolidate legislation with the aim of producing a much simpler and more straightforward set of regulations that landlords and tenants can easily understand. A simpler, more straightforward set of quality and safety standards for housing in the sector ensuring that planning and building regulations are consistent with these standards. Increasing awareness Government funded publicity campaign to promote awareness of tenants' and landlords' respective rights and responsibilities. Introduction of easy-to-read key fact sheets for landlords and tenants setting out each party's key rights and obligations. Raising standards The LGA should make sure that mechanisms are in place to ensure all councils learn from the good practice and take effective steps to improve standards of property and management in the private rented sector. Where possible the cost burden of enforcement arrangements should be placed upon those landlords who flout their responsibilities. Empowering councils to impose a penalty charge where minor housing condition breaches are not remedied. Where landlords are convicted of letting property below legal standards, local authorities should be given the power to recoup from a landlord an amount equivalent to that paid out to the tenant in housing benefit and retain the money recouped to fund their work to raise standards. Those tenants who have paid rent with their own resources should also have the right to reclaim this rent when their landlord has been convicted of letting a substandard property. Illegal eviction The LGA should ensure that lessons on tackling illegal eviction are learnt and disseminated. DCLG and the Home Office should jointly issue guidance setting out clearly the role of the police in enforcement of the Prevention from Eviction Act 1977.

8 Licensing and accreditation Councils should be given greater freedom over when licensing schemes can be introduced and more flexibility over how they are implemented. Councils should be given the power to require landlords to be members of an accreditation scheme run either by the council itself or by a recognised landlords association. Councils should be given the powers to impose heavy penalties on those who do not register for licensing or compulsory accreditation. The Government should initiate a review of the fines imposed by the courts for letting substandard properties, to ensure they act as a sufficient deterrent. Houses in multiple occupation (HMOs) A review of the mandatory licensing of houses in multiple occupation to consider, amongst other things, evidence of the effectiveness of mandatory licensing, how well it is enforced and whether the definition of a prescribed HMO should be modified. Councils should have the ability to control the spread of HMOs and continue to have the option to use Article 4 directions to remove permitted development rights allowing change of use to HMO. Universities should be working with local authorities and student groups to ensure that there is sufficient housing in appropriate areas and that students act as responsible householders and members of the community. Safety standards Government should work with the electrical industry to develop an electrical safety certificate for private rented properties requiring a full wiring check every five years and a visual wiring check on change of tenancy. Government should introduce a requirement for all private rented properties to be fitted with a working smoke alarm and, wherever a relevant heating appliance is installed, an audible, wired-up carbon monoxide alarm. Regulation of letting agents As part of its consultation on the redress scheme, the Government should seek views on how best to publicise such a scheme and what penalties should be in place for those agents who do not comply. It should also explore how the redress scheme fits alongside existing arrangements for deposit protection and ensure that it is accompanied by a

9 robust code of practice that sets out clear standards with which agents are required to comply. Letting and managing agents should be subject to the same regulation that currently governs sales agents including giving the Office of Fair Trading the power to ban agents who act improperly, and making client money protection and professional indemnity insurance mandatory. Agents' fees and charges The code of practice accompanying the new redress scheme should include a requirement that agents publish a full breakdown of their fees alongside any property listing or advertisement. The code should also require agents to explain their fees and charges to tenants before showing them around any property, forbid double charging, and require that landlords are informed of any fees being charged to tenants. If agents do not meet these requirements, the fees should be illegal. The professional bodies should make a commitment to full, up front transparency on fees and charges a requirement of membership. Longer tenancies The flexibility of assured shorthold tenancies should be better exploited and the option of using assured tenancies should also be considered where these meet the needs of landlords and tenants. The Government should examine proposals to speed up the eviction process for tenants who do not pay rent promptly or fail to meet other contractual obligations and a quicker means for landlords to gain possession if they can provide proof that they intend to sell the property. The Council of Mortgage Lenders should work with lenders to ensure that they allow their buy to let borrowers to offer longer term tenancies. The Government should include in the code of conduct for letting agents a requirement both to make tenants aware of the full range of tenancy options available, and, where appropriate, to broker discussions about tenancy length between landlords and tenants. Rents and affordability Where longer tenancies are being established, linking increases to inflation or average earnings or voluntarily agreeing a fixed uplift each year merit consideration and could provide tenants and landlords with a degree of stability.

10 Tenants', landlords' and agents' groups should encourage their members to discuss these options at the outset of a tenancy. Placement of homeless households in the private rented sector Expect councils to pay full regard to forthcoming revised secondary legislation which will clarify when accommodation is unsuitable for homeless households. As a matter of good practice, local authorities should inspect properties before using them for the placement of homeless households. Before any placement of a homeless household outside their local areas there should be a full discussion with the receiving authority and the prospective tenant and information about the household and its on-going needs should be shared. The Government should consider making this a statutory duty. Government should work with local government, the charity sector and industry bodies to ensure best practice is shared and lessons learned on supporting homeless households in the private rented sector. Local housing allowance Government should take immediate steps to allow councils to apply for a variation of broad rental market area boundaries where anomalies occur. A wide-ranging review of local housing allowance to assess whether there is greater scope for local flexibility over the setting of LHA rates and the boundaries of broad rental market areas. Data quality & Tax Government should establish a small task group to consider how data relating to the private rented sector can be improved and made more readily available. The National Audit Office should contribute to an effective evidence base about the sector. The Government should bring forward proposals for greater co-ordination between the tax authorities and those regulating the private rented sector. Increasing supply Take steps to ensure that the Build to Rent Fund makes a net addition to new housing, as well as speeding up the delivery of those homes already in the pipeline. In its response to the Committee s report the Government should provide the number of applications it has received for the private rented sector guarantee

11 scheme and an estimate for the number of additional homes it expects the scheme to deliver. If there is any doubt that the private rented sector guarantee scheme is going to deliver the homes required, the Government should rapidly explore other options. The Government, in its response, should set out the progress made by the PRS Investment Taskforce including the amount of additional investment brokered and the number of additional homes it would deliver. If, in a year's time, there is no evidence that promoting high-quality build to let development will lead to improved choice, quality and affordability across the whole sector the Government should reconsider its strategy and look to other measures to boost supply across the sector as a whole. The Government should revisit the Committee's report on the Financing of New Housing Supply, and set out proposals to implement those recommendations it initially rejected. Comment The number of households renting privately has now overtaken the number in the social rented sector. At the same time owner occupation has stagnated at around 15 million homes, falling as a proportion of total households to 64% the lowest level for 25 years. It is not surprising therefore that local councils, and central government, are taking a keen interest in the sector. LGIU research shows that 8 out of 10 councils want to engage more actively with the sector, with Housing Minister, Mark Prisk wanting a bigger and better private rented sector. The Select Committee believes felt that there are dangers in interfering too much in a market that is still changing and yet to settle down, concluding that it is more important to find ways to bring the market to maturity. How that is achieved is open to a considerable degree of interpretation - guided by local needs and national political philosophy. This has already been demonstrated by the quite different approaches being taken at a local level which will be shown by a forthcoming report from the LGIU on local authority relationships with the private rented sector. But is the market really significantly changing? And, given that the private sector has now overtaken the social sector in size, is not the bigger risk that the opportunity to shape the market is passing us by? The Government would argue that it is doing just that, except that its efforts in encouraging institutional landlords/investors is focused on the higher end of the market, rather than where there is an acute need, not only from vulnerable but also median income families. It maintains that the rest of the sector will benefit. This is

12 unashamedly trickle down economics. But will investment at that end of the market free up sufficient excess capacity lower down the market providing for greater tenant choice and a downward pressure on rents? Or will it, instead, just turn up the heat on existing rental hot spots by setting a new high achieved rent, pushing up average rents even higher? The Government s explanation of just how this investment will benefit the sector as a whole is not entirely convincing, leading to the conclusion that the Government s actions in the wake of the Montagu review seems to be more driven by economic growth (a worthy aim) than securing significant additional and truly affordable homes. The Select Committee rejected rent controls, saying that this course of action would drive down investment. They believe that 6% average sector yields not to be excessive, but seem to ignore the reality of the situation, with figures from the English Housing Survey reporting that private tenants now spend 43% of their disposable income on rent (for those in social housing, it's 29%). According to the Resolution Foundation even a very modest rented home is beyond the reach of low income households in 33% of all local authority areas with the same research also finding median income families are also struggling. They will continue do so, even in the unlikely scenario that rents maintain their current levels, as household incomes are expected to stagnate until More likely than not, with an extra 1.5 million households under 30 looking for private rent housing by the same date - pushing demand and rents further - the urgency of the current situation will give way to a crisis. Can we wait for a trickle-down effect, even if one can be guaranteed? Increasing supply will put a brake on ever rising rents, but we need to build more homes in the right places, of the right type and at the right price (whether to buy or rent) to meet the needs of households who currently have few options. Greater scrutiny of the Government s plans here are required - not just the overall numbers. An alternative way to proceed in channelling and directing institutional investment would be for investors to work in partnership with housing associations, including directly investing in social housing. At the same time housing associations should be actively encouraged to expand into market renting. Indeed, should the Government not look to significantly expand the housing association sector by bringing in new players and encouraging mergers where (and only where) it might strengthen the sector in terms of investment potential? While prospect of rent controls is off the table even Shelter does not support them - making rent increases more predictable by indexation or fixing them certainly is. Making it happen given the structure of the market will not be easy. Given that threequarters of landlords use agents, tackling vested interests will be crucial. But this will only tackle the affordability issue at the margins. For more information about this, or any other LGiU member briefing, please contact Janet Sillett, Briefings Manager, on janet.sillett@lgiu.org.uk