Fixing the problems with the housing market

[IvanV]

The Guardian yesterday published an opinion article arguing for the end of private landlords. It is written by a barrister who has just published a book making that argument.

The author argues that there is no shortage of housing in Britain. He says we have the same number of dwellings per capita as the average in Europe. That seemed to contradict the general wisdom. And the data sources I can find, OECD and Statista both suggest his claim is, to use a technical term, utter bollocks. But there are substantial differences between those two data sources suggesting it may vary considerably considering how you count it. What you count as a dwelling, how you count the population.

The author argues that landlords make excessive returns from their investments, because they charge "monopoly prices". Which is just economically illiterate. With around 1,000,000 private landlords, how can you call that a monopoly? They charge to the value of the market, like anything else in limited supply. Energy. Steel. Etc.

In fact, despite rents being up 9% over the last year, private landlords are reducing their holdings because returns are insufficient. In part that's because taxes on their earnings have been increased. And a 9% price increase is unsurprising when general cost inflation was recently over 10%, which probably takes a bit longer to come through to rents than to goods on shelves. Especially when house construction and maintenance costs have been going up faster than general inflation, and housing insurance costs are also hugely up, like car insurance. Accommodation has got more expensive for everyone.

Clearly if you ban people from renting out houses, the amount of money trying to buy houses reduces and the price of buying a house goes down. But that mainly benefits people who can afford to buy a house to live in. And withdraws from supply their houses that they find it convenient to own, but currently are not living in.

The author's suggestion is that the rental houses should be bought up by municipalities and rented out. Apparently in the 1970s municipalities bought up some of the private rental stock and converted it to social renting. But that was slowed down by shortage of capital as the 70s proceeded, and then completely reversed on ideological grounds by Mrs Thatcher, who forced councils to sell property to the occupiers at a discount. That still goes on, I'm amazed to learn.

The author points to the case of Vienna. The council and local housing cooperatives together own about 60% of the housing stock and rents it out at protected rents. Another 20% is privately rented. Since you can't get into one of those protected rent places until you have lived there for a couple of years, there is still a rented sector which supplies them. There are also up-market rentals of posh properties, which the council doesn't provide for. I suspect the council/cooperatives are also not in the rooming sector, where houses in multiple occupation are rented by the room.

I think what this actually shows is that there's nothing inherently wrong with private renting, the real problem is that our social rented sector is far too small, in large part because it was sold off under Thatcher. And of course municipalities are hugely starved of funds and find it difficult to expand. Because social housing sell-offs are continuing, the social housing sector continues to shrink despite new construction.

The author suggests that councils could buy up the rental sector over about 10 years. Even if rental dwellings are worth only an average of £100k, rather than the £250k or something that is the average value of a dwelling in Britain, then the 4.8m privately rented sector is worth £4,800bn pounds. That is an astonishing amount of money for our local authorities to have to raise to take it over. And then with private renting banned, or largely so, they would have to be much more the funders of new rental accommodation going forward than currently. I rather wish they were already. But in present financial conditions at local level, nothing like that will happen.

Most economists continue to think that the main reason for the shortage of housing in Britain is the planning laws. If even the Dutch can have a lot more housing per capita than us, as I think they do, despite this author's insistence that they don't, I think we can have a lot more housing in this country, and put it more nearly in the right places.

[Martin_B]

You may want to check your maths on this:

The author suggests that councils could buy up the rental sector over about 10 years. Even if rental dwellings are worth only an average of £100k, rather than the £250k or something that is the average value of a dwelling in Britain, then the 4.8m privately rented sector is worth £4,800bn pounds. That is an astonishing amount of money for our local authorities to have to raise to take it over.

4.8 million at £100k each wouldn't make £4,800bn but £480bn. Still a lot of money, but not quite as bad as your post suggested.

[discovolante]

I only managed to skim the beginning of the article yesterday but I did wonder why early on at least he didn't seem to be distinguishing between privately owned property and social housing. At least he apparently addresses that later. I'm going to promo event for the book towards the end of next month, obviously it won't be a debate environment but I might see if I can put together a couple of questions.

[Imrael]

In fact, despite rents being up 9% over the last year, private landlords are reducing their holdings because returns are insufficient. In part that's because taxes on their earnings have been increased. And a 9% price increase is unsurprising when general cost inflation was recently over 10%, which probably takes a bit longer to come through to rents than to goods on shelves. Especially when house construction and maintenance costs have been going up faster than general inflation, and housing insurance costs are also hugely up, like car insurance. Accommodation has got more expensive for everyone.

Interesting article - thanks.

I do think that over-simplifies the reason private landlords are quitting. As a disclosure, I have one property rented out at the moment - its more of a family accident than a deliberate strategy that I own it. Because its debt free and I have an excellent tenant the rate of return isnt terrible. Nonetheless when the current tenant wants to leave I'll sell it. (And I have offered it to her).

If you have a small number of properties the income becomes somewhat unreliable. There are of course regular expenses, but also a fairly constant stream of maintenance items. Plus its amazing how much a careless or ill-willed tenant can cost. My last change of tenant cost around 5 years of income, of which maybe 1 year was a routine refresh, The rest was a mixture of vandalism (all done in the few weeks between last inspection and actual departure) and failing to report stuff. Keeping a one-month-rent deposit doesnt really dent that

Changes to eviction laws and building standards are also much talked about as a concern. Personally I dont think theres much actual problem, but many see it differently. And of course landlords are pretty much a comedy villain nowadays.

Edit: Personal theory - there should be some sort of tax incentive for selling to sitting tenant. Maybe stamp duty relief for tenant and a capital gains tax allowance increase for vendor.

[IvanV]

You may want to check your maths on this:

The author suggests that councils could buy up the rental sector over about 10 years. Even if rental dwellings are worth only an average of £100k, rather than the £250k or something that is the average value of a dwelling in Britain, then the 4.8m privately rented sector is worth £4,800bn pounds. That is an astonishing amount of money for our local authorities to have to raise to take it over.

4.8 million at £100k each wouldn't make £4,800bn but £480bn. Still a lot of money, but not quite as bad as your post suggested.

Sorry. I realised I'd miscounted my zeroes as soon as I left the house immediately after making the post...

Although still a large number, it makes an difference. I think it is not quite so implausible to think of £50bn a year being invested in buying out privately rented property. Albeit not in the current financial climate where the public sector is so hard up for funds.

But clearly the entities buying out the houses and renting them would have to break even. They wouldn't suffer the taxes that are currently making it difficult for private landlords to break even. But they would likely be much less efficient at maintaining and managing the properties, as many small private landlords make that efficient by doing a lot of the work themselves rather than contracting it out. Of course, some private landlords make this add up by not maintaining the properties adequately, and I acknowledge that is a genuine problem in part of the sector. I'm not sure whether it is an inherent problem, or a problem of inadequate regulation. Meanwhile, inadequate maintenance is also a major problem in the social rented sector.

[dyqik]

But they would likely be much less efficient at maintaining and managing the properties, as many small private landlords make that efficient by doing a lot of the work themselves rather than contracting it out. Of course, some private landlords make this add up by not maintaining the properties adequately, and I acknowledge that is a genuine problem in part of the sector. I'm not sure whether it is an inherent problem, or a problem of inadequate regulation. Meanwhile, inadequate maintenance is also a major problem in the social rented sector.

You have this backwards. DIY and small landlords hiring in contractors is much less efficient than a large scale landlord who has maintenance tradepersons on staff, or contracts with larger trades companies.

Anyone who has attempted to hire an electrician or plumber can tell you this - it needs weeks of pfaffing about to get a quote. And DIY either isn't legal, or is much slower than a hired tradesperson.

[lpm]

Because its debt free and I have an excellent tenant the rate of return isnt terrible. Nonetheless when the current tenant wants to leave I'll sell it. (And I have offered it to her).

The statistics show that, in the past few decades, investing in UK property has not delivered a higher return than investing in a global or US equity index fund. This suggests that debt-free purchase of buy-to-let property or holiday let properties isn't in fact worth the extra hassle.

However property has been a path to greater wealth due to buy-to-let landlords using leverage. The extra risk from leverage is hidden but gains are multiplied. It is impossible to borrow to invest in a US equity index fund in the same way.

The other factor is that investing in UK property has delivered far higher returns than investing in the sh.t FTSE 100 index. Home bias in typical pension funds means we are all losing out relative to investors in other countries. Another privilege of living in broken Britain.

[IvanV]

But they would likely be much less efficient at maintaining and managing the properties, as many small private landlords make that efficient by doing a lot of the work themselves rather than contracting it out. Of course, some private landlords make this add up by not maintaining the properties adequately, and I acknowledge that is a genuine problem in part of the sector. I'm not sure whether it is an inherent problem, or a problem of inadequate regulation. Meanwhile, inadequate maintenance is also a major problem in the social rented sector.

You have this backwards. DIY and small landlords hiring in contractors is much less efficient than a large scale landlord who has maintenance tradepersons on staff, or contracts with larger trades companies.

Anyone who has attempted to hire an electrician or plumber can tell you this - it needs weeks of pfaffing about to get a quote. And DIY either isn't legal, or is much slower than a hired tradesperson.

It is efficient in the sense that that the labour is basically free. Yes, you have to hire electricians and gas-fitters when you are going to be renting a house out to ensure that those tasks are properly certified. But most of the work is the kind of thing that competent DIY makes cheap. I've known people who had a few houses to let, and it made them money because they did most of the work themselves, and they were good - and fast - at it. Redecorating, carpentry, simple masonry repairs, kitchen fitting, tiling, floor laying, this is most of it. I rented a house once, and when there was a problem that needed prompt attention, the owner came and fixed it that day or evening. Be rare to get that speed of attention from a large landlord.

[dyqik]

But they would likely be much less efficient at maintaining and managing the properties, as many small private landlords make that efficient by doing a lot of the work themselves rather than contracting it out. Of course, some private landlords make this add up by not maintaining the properties adequately, and I acknowledge that is a genuine problem in part of the sector. I'm not sure whether it is an inherent problem, or a problem of inadequate regulation. Meanwhile, inadequate maintenance is also a major problem in the social rented sector.

You have this backwards. DIY and small landlords hiring in contractors is much less efficient than a large scale landlord who has maintenance tradepersons on staff, or contracts with larger trades companies.

Anyone who has attempted to hire an electrician or plumber can tell you this - it needs weeks of pfaffing about to get a quote. And DIY either isn't legal, or is much slower than a hired tradesperson.

It is efficient in the sense that that the labour is basically free. Yes, you have to hire electricians and gas-fitters when you are going to be renting a house out to ensure that those tasks are properly certified. But most of the work is the kind of thing that competent DIY makes cheap. I've known people who had a few houses to let, and it made them money because they did most of the work themselves, and they were good - and fast - at it. Redecorating, carpentry, simple masonry repairs, kitchen fitting, tiling, floor laying, this is most of it. I rented a house once, and when there was a problem that needed prompt attention, the owner came and fixed it that day or evening. Be rare to get that speed of attention from a large landlord.

I hope you're not arguing that someone's time has no value? Because that's extremely poor economics...

[IvanV]

I hope you're not arguing that someone's time has no value? Because that's extremely poor economics...

Clearly time has value. This nice little paper from LSE came to my attention earlier today, and is a very nice experiment determining the value of people's time in different activity.

But the point is that no money changes hands. So the value of that labour materialises as increased profit of the business. It may turn out that they have implicitly sold their labour quite cheaply, in comparison to what they can earn as a formal job. It may be that they are quite good at this, but without any qualifications would have difficulty getting a formal job doing that or selling that service to other people, and this is their way of obtaining value from that skill. Or they gain some satisfaction from doing it from time to time, just not all the time thank you. And some people seem more willing to give their time to family enterprises, than other things they'd rather not be doing. As we note in that paper I just referred, people are on average more willing to spend their time doing household chores for their own household, than most other things they'd rather not be doing.

[bolo]

And if you do $100 worth of labor on a property you own, you capture the full value of that $100, whereas if you do the same work for someone else and get paid $100, you have to pay tax on it.

[dyqik]

I hope you're not arguing that someone's time has no value? Because that's extremely poor economics...

Clearly time has value. This nice little paper from LSE came to my attention earlier today, and is a very nice experiment determining the value of people's time in different activity.

But the point is that no money changes hands. So the value of that labour materialises as increased profit of the business. It may turn out that they have implicitly sold their labour quite cheaply, in comparison to what they can earn as a formal job. It may be that they are quite good at this, but without any qualifications would have difficulty getting a formal job doing that or selling that service to other people, and this is their way of obtaining value from that skill. Or they gain some satisfaction from doing it from time to time, just not all the time thank you. And some people seem more willing to give their time to family enterprises, than other things they'd rather not be doing. As we note in that paper I just referred, people are on average more willing to spend their time doing household chores for their own household, than most other things they'd rather not be doing.

But specifically in the case of landlords, would they do this is they weren't making a tidy profit on the rent?

[IvanV]

I hope you're not arguing that someone's time has no value? Because that's extremely poor economics...

Clearly time has value. This nice little paper from LSE came to my attention earlier today, and is a very nice experiment determining the value of people's time in different activity.

But the point is that no money changes hands. So the value of that labour materialises as increased profit of the business. It may turn out that they have implicitly sold their labour quite cheaply, in comparison to what they can earn as a formal job. It may be that they are quite good at this, but without any qualifications would have difficulty getting a formal job doing that or selling that service to other people, and this is their way of obtaining value from that skill. Or they gain some satisfaction from doing it from time to time, just not all the time thank you. And some people seem more willing to give their time to family enterprises, than other things they'd rather not be doing. As we note in that paper I just referred, people are on average more willing to spend their time doing household chores for their own household, than most other things they'd rather not be doing.

But specifically in the case of landlords, would they do this is they weren't making a tidy profit on the rent?

They do it because they think that they will make a tidy profit on the rent. Though in fact a lot of that profit, that they earn as rent, derives from their labour rather than their capital.