When the Chancellor John Healey stands up to deliver the Budget on 28th October, landlords may be forgiven for watching particularly closely.
The arrival of Andy Burnham in Downing Street has brought a new political direction and, potentially, a more interventionist approach to the private rented sector (PRS). The Prime Minister has previously supported rent controls and greater regulation of landlords, although he has also acknowledged the importance of a vibrant PRS and the need for more homes across all tenures.
It is too early to know precisely how those instincts will translate into national policy. But as the Treasury considers its options for raising revenue, there is one principle we would urge the government to keep firmly in mind: a tax or additional cost imposed on a landlord does not necessarily stop with the landlord. Ultimately, this needs to be a Budget for tenants too.
Landlords have already absorbed a succession of tax and regulatory changes over the past 15 years. Mortgage interest tax relief has been restricted, the stamp duty surcharge on additional properties has increased, regulation has expanded and the Renters’ Rights Act is introducing another substantial package of change.
Individual measures may be easy to justify in isolation. The danger lies in failing to consider their cumulative effect, particularly in a market where demand for rented homes already exceeds available supply in many parts of the country. The latest ONS figures underline that pressure. Average UK private rents rose by 3.7% in the year to July, reaching £1,393 a month, with rents in England averaging £1,451. Perhaps most strikingly, the strongest annual increase in England was not in London or the South East, but in the North East, where rents rose by 6.3%. Tenants across the country are already facing rising housing costs, making it particularly important that policy does not inadvertently add further pressure.
We now have some indication of how landlords themselves are likely to respond to further costs. The latest research from Pegasus Insight finds that 71% of landlords are worried about the prospect of a two percentage point increase in income tax on property held in personal names, up nine percentage points on the previous quarter. More important for policymakers, however, is what landlords say they would do next. Almost two thirds, 64%, say they would look to recoup losses through higher rents, and 83% agree that the changes would make them more selective about the tenants to whom they are prepared to let. These findings should give the Treasury pause for thought.
Landlords are sometimes discussed as though they operate independently of the people who rent their properties. In reality, the finances of the two are inevitably connected. Increase the cost of providing rented housing and landlords have a limited range of options: absorb that cost through lower returns, increase the rent where they can, reduce investment or ultimately leave the market. None is particularly helpful to tenants.
Higher rents are the most obvious consequence, but greater selectivity among landlords should concern government too. In a market where several prospective tenants may already be competing for the same property, landlords who feel financially exposed are understandably more likely to favour applicants they regard as presenting the lowest risk. That can make life particularly difficult for households on lower or less predictable incomes and those already struggling to find somewhere suitable to live.
There are other pressures to consider. Pegasus Insight’s research finds that 77% of landlords are now very concerned about the potential for court backlogs when possession reforms take effect, up four percentage points since the first quarter.
That is not an argument against protecting tenants or ensuring that landlords meet appropriate standards. IMLA has consistently supported a well-regulated PRS in which tenants are treated fairly and poor practice is addressed.
But good regulation also has to recognise that landlords need confidence that the system will work when things go wrong. If possession cases become trapped in an overstretched court system, the perceived risk of letting inevitably rises. Once again, the unintended consequence may be greater caution about whom landlords are prepared to house.
The government has rightly made increasing housing supply a priority and its commitment to a major programme of council housebuilding is welcome. But those homes cannot appear overnight. Millions of households rely on the PRS and will continue to do so for many years to come.
We therefore need policy that encourages responsible landlords to remain in the market and, ideally, to invest in more homes, alongside the expansion of social and affordable housing.
That does not mean landlords should be immune from taxation or regulation. It means recognising that the PRS is an interconnected market and assessing policy according to its likely consequences, not simply its intentions.
Ahead of the Budget, there will inevitably be pressure on the Chancellor to find additional revenue, and property can look like an attractive target. But another turn of the screw on landlords risks feeding directly through to higher rents, greater caution over who they let to and ultimately fewer homes available to rent.
The government has an opportunity to show that it understands those consequences. Tenants need a thriving, well-functioning rental market with enough homes to meet demand. The Chancellor should be very wary of doing anything on 28th October that makes those homes harder or more expensive to find.
