Blain’s Morning Porridge – 28th March 2023: The Rent Debate – Part 2. How to Fix UK Housing.
“Our house in the middle of our street… Our house was our refuge and our keep.”
This morning: Part 2 of the London Rent Crisis. London, and whole UK housing market, is broken. Demand greatly exceeds supply allowing rotten greedy landlords to game the system and abuse tenants. Can it be fixed – absolutely…
I got a considerable amount of stick for my comments on London’s broken rental market last week. My modest proposal to stick the heads of greedy, dishonest professional landlords on the spikes of Tower Bridge might have worried more than a few readers. It was suggested my article lacked balance. Yes, it did.
I picked a good time to get angry. Obscene rentals are back on the national agenda. Last night the BBC, in its Panorama programme, raised the rental crisis and concluded London’s Slum/Rackman landlords have taken us back to the Victorian age in terms of overcharging for dangerous, poor quality housing – highlighting one particularly noxious example with a record for breaching rental laws converting 4 small ex-council flats into 24 insanitary bedsits on which he makes over £20,000 per month on. He preys on desperate housing benefit claimants. It was naked, disgusting greed. As tax-payers we pay that cost. Fit it. Fix him.
There is also a great article on Bloomberg – about the Swedish Housing market. The title sums it up: What Broke Sweden. Its worth a read for anyone thinking about the economic implications of failed housing policy.
The good news is many Porridge readers – including some right at the top of property financing and leading commercial landlords, came back with some serious suggestions and proposals to fix London’s rental sector. I will outline these below in the hope our current government or the next might pay attention. There are some great comments on the original article: An Open Letter on London Rentals
There were a number of predictable comments to my piece, my favourite being: “Worst piece of analysis I have ever seen and you claim to work in finance? You ought to educate yourself rather than rant just cause your daughter can’t pay her rent herself. Shocking really!” Exactly the kind of comment I predicted someone would make.
Many others criticised my comments but remained polite and constructive. They observed I was ranting, and that a serious discussion is required to solve the problem. Agreed – but a solution needs to happen quickly. We can’t delay.
The fact remains…. London’s rental market is broken. On top of increasingly sticky inflation, corporate slowdown and job insecurity, few young professionals can weather a 32% hike in their rental spending as the cost of everything goes up from council tax costs, bills, transport and food. Many workers will be forced out of London. I received many emails and linked-ins from desperate young City lawyers, junior bankers and other young City workers trapped in rental insecurity.
The exit of the rental demographic will have profound effects on London’s economy. Not the least will be the ultimate question: who is going to make your massively overpriced cup of coffee in the morning? Not even the best Barista in Britain will be able to afford to live in The Smoke anymore. (I spotted this looming crisis some time ago, so I’ve just done a course covering coffee from bush to cup at the marvellous Winchester Coffee Co – fascinating! The issue will be persuading our office Landlord to fit a decent coffee machine – on which I can control the grind. When I inevitably get binned for spending too much time making coffee and being utterly wrong about markets, at least I have a skill to sell…)
The Conservative Government did promise a comprehensive review of rental markets about a thousand years ago, but maybe it got distracted looking for jobs with fake Korean companies, Brexit Bumbling and being snottery during the pandemic.
Easy as it is to pot-shot the Government, last year it presented a white paper: “A fairer private rental sector”. Minister for Levelling Up Michael Gove (complex fellow, but I like his direct appreciation of problems), noted 2.8mm UK citizens should not pay to rent homes unfit to live in. He railed about tenants scared to complain, the problems of unfair rent increases, and that the imbalance between supply and demand, especially in London, which allows Landlords to simply serve a no-fault Section 21 notice to quit on any tenant who might question a rent hike, rendering accommodation security a lottery.
Gove wants to end Section 21 to give tenants the right to end it except if the Landlord can show valid grounds to end a tenancy. Most of my correspondents agree it has to go and 1-year tenancies be replaced by 5-yr plus tenure. Security of tenancy is critical to solve the rising mental health crisis caused by the torture of living in rented flats. Too late for my daughter though. On Saturday morning each flat of the floor of the block where she lives were served and required to sign for Section 21 notices, giving them 2 months to quit. She called the agent and was bluntly offered a simple choice – agree to the 32% rent hike in writing, commit to pay it or get out. That particular Landlord is sidestepping tenant rights on tribunals, gaming rental law, and manipulating the rules to force tenants to pay over the odds for accommodation.
She and her flatmates spent the weekend looking for alternative accommodation, there is absolutely nothing available – they reckon have no choic but to take the cut-throat 32% increase. That means a commensurate fall in their consumption – and forget any chance of saving for their own flats or pensions. In the face of such bad corporate behaviour Gove wants to put quality, affordability and fairness at the heart of the rental market. Good luck with that Minister.
The fact is inflation and higher mortgage rates have impacted private Buy-to-Let retail landlords. Many single property landlords find themselves with higher monthly payments, on top of an increasingly hostile rental tax regime and regulations. As a result, they feel forced to sell or raise rents. The question is – who is the fool? The tenant for being unable to afford the higher rent because they didn’t plan their future expenditures to account for the potential of higher costs, or the Landlord for taking on a financial burden they are unable to bear when rates rose? When inflation is 10%, why are flat rents rising tripple that?
The professional landlord class – either firms, or individuals with large portfolios – has no similar excuse for 32% rent increases. Their costs and interest rate sensitivities will be hedged or zero. That said.. despite their greed, lopping their heads off and nationalising the housing stock will not solve the current London housing crisis. It may make it worse.
The fundamental problem is that rental demand and supply are unbalanced. It’s taken 40 years since Thatcherism – everyone entitled to own their own home – to lead us to this position (including personal debt from housing!) Nothing wrong with the policies of home ownership and selling social housing stocks – but it seems incredible no one foresaw the consequences of not replacing sold council stock with new. Government of both hues is guilty.
The only way the current crisis can be solved is to correct the massive shortage of homes in London, and elsewhere across the UK. It requires a massive building and conversion programme, at a time of skills shortages and cost volatility. It can be done – but only with a serious government will and serious changes to the way homes are planned, prioritised and financed.
Today, I am told the immediate threat to the London rental market is a surge of returning Chinese students into the UK – and they all want good flats, encouraging greedy Landlords to use Section 21 to evict existing tenants to accommodate them. These dispossessed people have literally nowhere to go – their skills are not always transferrable outside London (certainly the jobs my kids do only exist in London), nor are there other flats to rent. Because they are in regular jobs, they can’t get housing benefit. To stay in London, in many cases close to family, they will have to become unemployed to get benefits to pay their rents. That’s…. unhelpful for the economy.
Social housing was one of the UK’s great triumphs – clearing slums and building homes for heroes after the unpleasantness (x2) with Germany last century. Government built over 4.4 million homes between 1945 and 1980 – with the additional benefit of creating economic growth through the building trades.
Since 1980, and the de-facto privatisation of the social housing stock, the number of social homes built has cashed. It fell to 6 thousand new council homes around the country in 2020. It has left over 1.1 million people on the social housing waiting list, largely forced to take whatever poor-quality rentals are available and claim benefits to afford them.
Yesterday the retiring head of L&G was in the FT saying levelling up is failing: “Are we building enough affordable housing, social housing, build-to-rent housing? No!” Yet the funding should be easy. New programmes to finance Social Housing through not-for-profit Housing Associations, guaranteed by government, could provide a very effective way to kickstart social home building, enticing the large UK real money accounts to finance these projects.
Some housing associations have “issues”. I’ve met CEOs who think they are bankers with hedge fund wealth expectations. Some are failing. Some are very good. What’s not to like about secured and guaranteed Housing Association bonds to finance new social rentals? What’s wrong with the large real-money accounts becoming responsible, sustainable landlords? I’ve looked at it many times. It should work. It will cost little to finance at a modest rate over gilts – and the guarantee from the state would be secured on the assets of the association.
It should not be a problem to target capital from the investment sector into a rental sector crying out to create more homes… but somehow it is. My sources in commercial property say there is plenty of capital that could immediately be directed at building rental properties. But there are many issues to overcome, like landlord costs to remove cladding, the root cause of the Grenfell Fire. The commercial property professionals point out the problem is not the desire to build more property for rent, but the broken, prohibitively expensive planning system – and hint broken and marginally competent local authorities are unqualified to run social housing.
I am assured that if Government set its mind to building new social housing, rejigged housing associations, and opened the gate to housing association developments, we could solve the rental crisis in 5-7 years. In the meantime, controls will be needed on issues like clamping down on greed, providing longer tenancies, the end of Section 21 insecurity and some form of rental controls.
Fixed rents set by local government has historically been disastrous – even short-term rent freezes (as we saw during Pandemic) can be abused, but would provide breathing space to create a new rental system/market. A system that gives renters long-term security, fair rent reviews and is equally fair to the landlord in terms of the ability to evict tenants for failure to pay or behaviour issues is required. Is it beyond the wit of man or government?
No time for Five Things this morning – I am rushing to catch the early train, which probably means an hour or so standing at the station being told what’s gone wrong with Britain’s railways today..
Out of time, off to the day job…
Strategist – Shard Capital