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Policymakers have generally done little to address those pressures. However, Chancellor of the Exchequer Jeremy Hunt may have made things worse in his Autumn Statement earlier this month. In a great play that social-housing rent increases will be capped at 7% next year, he reminded everyone that, unlike in the private rented sector, annual rent increases are the norm for social housing tenants.
Generally, social rents rise by the previous September’s CPI reading plus one percentage point. Under that CPI+1% formula, the social rent was to increase by 11.1% from next April. For all its shortcomings, the private sector is less formulaic and rents rise more slowly. According to the Office for National Statistics, private sector rents rose by just 3.8% year-on-year through October.
This contrast may appear with horror stories over the summer of new tenants facing significant rent increases. That’s because existing tenants tend to rent very well. A government survey published in May indicated that only 26% of current tenants experienced a rent increase in 2021, while 64% saw rents remain the same and 4% saw a decrease. (It appears that the remaining 6% included “no recorded response” or “don’t know”.)
Until now, most landlords have been content to keep good tenants happy by rocking the boat and not risking costly evictions. An empty property means not only receiving no rent, but also being liable for council tax and utility bills. Added to that is the uncertainty surrounding the new tenant. This is why rents are reset to market levels only when someone moves out.
However, as landlords’ costs rise (and typical mortgage rates have tripled this year), they are less able to absorb cost increases for existing tenants. And Hunt’s perhaps unwitting politicization of rent provides a convenient benchmark and precedent. If a 7% rent increase is considered “acceptable” in a subsidized social sector, squeezed private landlords are less likely to avoid raising their rents.
Yet the pressure on rents is not just a cost issue. The latest tax figures from HMRC suggest that 50,000 landlords have left the private rented sector since 2019. This is associated with a 34% jump in the 2021-2022 tax year from the previous year as homeowners sold.
More recently, rising mortgage costs have discouraged many current renters from owning their own home. A survey conducted for insurer Aviva shows that one million potential buyers under the age of 45 have excluded themselves from the first-time buyer market. They will mostly occupy the properties that small renters are looking for.
Given the complexity of the situation, including both cost pressures and supply constraints, there are no quick or easy fixes. Yet the relative stickiness of private-sector rents for existing tenants points to steps that can be taken to ease the strain.
It used to be the case that mortgage lenders specifically prohibited tenancy agreements of more than 12 months. However, in 2016 Shelter reported that lenders have begun to ease that restriction and some have removed it entirely. Unfortunately, tenancy agreements were slow to respond and still usually have six or 12 months as the standard term.
Making long-term tenants the norm will not only provide fewer opportunities for rent increases, it will also provide greater protection against no-fault evictions. With many potential first-time buyers resigning themselves to renting indefinitely, a long-term tenancy can alleviate at least some of the cost pressure.
Homeowners will be more likely to commit to the market for longer if the capital gains tax system is changed to encourage long-term investment. Since the 2008 budget, capital gains have been taxed without any allowance to intervene in inflation. This means that long-term investments are taxed as heavily as short-term speculative gains, although much of the former is likely to have arisen from general inflation. This has encouraged a short-term approach to investment.
Distinguishing between short-term and long-term benefits would greatly reduce the incentive for landowners to cash out whenever property prices experience short-term, cyclical increases. Tweaking taxation to reward long-term homeowner commitment over short-term speculation would help ease some of the supply pressures.
Playing politics in the rental market will only make things worse. If the Chancellor wants to set a precedent for private-sector rents, he should freeze social rents entirely. As he is likely to find out the cost to him and the tenants, you can’t just mandate stability.
More from Bloomberg Opinion:
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• Recession probably scares retailers more than China protests: Andrea Felted
• Juventus lay bare soccer’s rotten finances: Kris Bryant
This column does not reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stuart Trow is co-host of “Money, Money, Money” on Switch Radio and author of “The Bluffer’s Guide to Economics.” Previously, he was a strategist at the European Bank for Reconstruction and Development.
More stories like this one are available at bloomberg.com/opinion
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