It should come as no surprise that housing continues to be one of the key political topics. The ‘housing crisis’ and challenges younger generations face getting on the property ladder are common in the news. But with the Labour party pledging rent controls, some landlords may be wondering what they mean and how it could affect them.
This isn’t the first time that rent controls have been proposed, and they are already used in some countries. In fact, the UK had rent controls in place in the past. So, why are rent controls being proposed now?
Alongside rising property prices, rents have increased too. In London, the average monthly rent for a private property increased by 35% between 2011 and 2018. At a time when wages growth has been stagnant, it means renters are spending more of their income on rent. It’s an issue that’s particularly affecting younger generations. These circumstances have led to some calling for controls to be put in place.
Rent controls in the UK
Whilst landlords today may be unfamiliar with rent controls, they were a part of the rental sector during much of the 20th century.
First introduced in 1915, rents were capped at August 1914 levels. They were relaxed before the outbreak of World War Two but reintroduced in 1939. The regulation wasn’t abolished until 1989. Whilst we haven’t had rent controls in the UK for 40 years, other countries have implemented measures since in a bid to ensure housing remains affordable.
There are many different ways rent controls can be introduced, among them:
1. Freezing rents
Placing a temporary freeze on rents would aim to bring down costs for renters gradually over time relative to income. As housing costs have far outstripped salary growth since the financial crisis, it’s argued this measure would help make rent more affordable.
2. Cap on rental prices
There have been examples of governments imposing caps on the amount that can be charged for rental properties. This would aim to create a market where rental costs are broadly similar for comparable properties. Typically, there has been some leeway in this approach, such as being able to charge up to 20% of the price assigned to certain areas.
3. Limited rent increases
Limiting when rent can be increased and by how much is another option. An example of this would include rental prices increasing in line with inflation only. It could mean that, in some cases, it’s more desirable to have short-term tenants over those that stay for a longer period of time.
Rent controls are already used around the world, including in New York City, Paris and Berlin. They all aim to make renting more affordable but haven’t always been successful. For example, research from Stamford University suggests rent controls led to some landlords converting their properties into expensive apartments to get around restrictions. As a result, renters may have had less choice and still spent a significant portion of their income on rent.
The impact on landlords
The impact of rent controls would vary greatly depending on your plan and the way they were implemented. Whilst rent controls in the UK aren’t to be implemented as the housing crisis continues to be debated, it’s likely a topic that will be mentioned in the future. So, how could it impact you?
- Reduced rental yields: In some cases, rent controls could reduce existing rental yield. This will clearly affect the profitability of a rental portfolio but, if your margins are low, it may mean that property is no longer a viable option. If this is the case, you should look at other solutions for assessing how to maintain and grow your wealth.
- Limits on growth: Some types of rent control will leave your current yields intact but limit growth potential. They could, for instance, place a freeze on rental increases or limit these to match inflation. It could have a large impact further down the line. Remember, mortgage interest rates are low now but could increase later. Would renting a property still match your financial plans if your outgoings increased whilst rents were frozen?
- Lower property value: If selling the property is part of your future plans, how would rent controls affect the sale price? You may find the value of the property is lower or that the pool of potential buyers is smaller as a result.
The regulations around renting property change and it’s important to keep up with how these could affect you. Like other areas of your financial plan, regular reviews are essential and can help you get the most out of property assets.
Categorised in: Financial planning
This post was written by John Davies