National Residential Landlords Association – Written evidence (UKH002)

1.0              About Us

1.1              The National Residential Landlords Association is the UK's largest membership organisation for private residential landlords, supporting and representing over 90,000 members in England and Wales.

1.2               NRLA members range from full-time landlords running property portfolios to those letting single bedroom flats. We help our members navigate the regulatory and legal framework for the private rented sector and proudly offer some of the most comprehensive learning resources and market-leading intelligence available in the sector.

1.3              We seek a fair legal and regulatory environment for both landlord and tenant and actively seek to work with the Government on behalf of our members. In addition, our representatives run regular branch meetings and landlord courses in over 100 locations throughout England and Wales and provide an important link for our members with local authorities and fellow landlords.

2.0              Executive Summary

2.1              In 2019/20 the private rented sector in England accounted for 18.7% of all households, down from a recent high of 20.3% in 2016/17, which aligns closely with the implementation of recent tax change on the sector including restricting mortgage interest relief to the basic rate of income and introducing a new stamp duty levy on the purchase of properties to rent out.

2.2              The demand for rental accommodation remains strong, particularly as the country recovers from the pandemic. The consequence is that prospective tenants are struggling to find the properties they need to rent, where they want to rent them at a price they can afford.

2.3              Whilst recent years have seen the introduction of a suite of tax measures designed to slow the market, this has proved counterproductive in meeting the Government’s ambitions to support homeownership. Professor David Miles, a former member of the Bank of England’s Monetary Policy Committee has rightly observed that: “aspiring first-time buyers are hardly helped by squeezing the supply of rental property and driving rents up.”

2.4              There is therefore a desperate need to develop policies to boost the supply of homes for private rent alongside all other tenures. We propose the following mix of tax measures and other policies designed to provide greater certainty to the market:

• Reversing the changes made to mortgage interest relief in the 2015 Summer Budget.

• Not applying the 3% stamp duty levy on additional homes in cases where landlords add to the net supply of housing. It is completely illogical at a time of housing shortage to have a tax on new homes.

• Providing greater certainty for landlords about what will be expected of them in respect of the energy efficiency of rental properties and how to decarbonise them. This should include a financial package to support such improvements such as ensuring energy efficiency measures carried out by a landlord are allowed to be offset against tax as repair and maintenance, rather than as an improvement at sale against Capital Gains Tax.

• The Local Housing Allowance should, at the very least, be returned to the 30th percentile to better reflect actual market rents.

• A financial package should be developed to help private renters to pay off COVID related areas similar to those schemes developed in Scotland and Wales.

3.0              Composition of the Private Rented Sector and Demographics Shaping It

3.1              According to the English Housing Survey, in 2019/20 18.7% of all households in England, 4,438,000 are in the private rented sector, making it the second largest housing tenure, behind owner occupation. This has fallen from a recent high which in 2016/17 saw the sector make up 20.3% (4,692,000) households.[1]

3.2              As outlined in table 1, what is most notable is that the private rented sector is no longer simply a tenure for young people. Over the past decade some of the most significant growth within the sector has been amongst older tenants, especially those aged 55-64 and 45-54. The Government has noted that the average age of a private sector tenant is now 41[2].

Table 1: Age of Household Reference Person in Private Rented Households in England

2009/10 and 2019/20[3]

3.3              In addition to the changing age profile of private tenants, the last decade has seen the number of private rented households in England with at least one dependent child living in them having increased from 1,051,00 (31.3%) in 2009/10 to 1,598,000 (36%) in 2019/20.

3.4              We also know that:

• Private renters have lived in their accommodation for an average of 4.3 years[4].

• 83.1% of private renters are satisfied with their current accommodation, a higher proportion than the 77.7% who said the same in the social rented sector[5].

• Similarly, 75.2% of private renters are satisfied with repairs and maintenance compared to 65.8% of tenants who said the same in the social rented sector[6].

4.0              Profile of Private Landlords

4.1              Any work focussed on the supply of homes for private rent needs to take into account the demographics of private landlords. According to the Government’s most recent data[7]:

• 94% of private landlords rent property as an individual, 4% as part of a company and 2% as part of some other organisation.

• 45% of landlords have just one rental property. A further 38% own between two and four properties. The remaining 17% of landlords own five or more properties.

• 46% of landlords became a landlord because they preferred property to other investments; 44% did so to contribute to their pension. 4% became a landlord to let property as a full-time business.

• 53% of landlords bought their first rental property with the intention of renting it out. 32% did so to live in themselves.
  

4.2              An analysis by the NRLA[8] suggests that the average net annual rental income per private landlord is less than £4,500.

4.3              Government data[9] also suggests that’s almost 70% of private sector landlords are basic rate income taxpayers.

5.0              The Demand for Private Rented Housing is Increasing

5.1              Whilst the Government’s primary objective for housing has been to encourage and support those wanting to become homeowners, at present the data is clear that the demand for private rented housing is outstripping supply.

5.2              A wide ranging survey of members of the NRLA in England and Wales, conducted in partnership with the research consultancy BVA/BDRC[10], found that 39% said that demand for homes to rent had increased in the second quarter of 2021 – an 8% increase on the first quarter of the year and a five year high. BVA-BDRC observes that demand has increased largely due to the relaxation of COVID restrictions and a more buoyant economic outlook.

5.3              The figures mask a trend which is seeing a two-tier rental market developing across particular regions in England and Wales. In Yorkshire and the Humber, Wales, the South West and the South East over 60% of landlords said that demand for homes to rent had increased. In stark contrast, just 15% of landlords in Central London said demand had increased in the second quarter of the year, compared with 53% who said it had fallen. This supports the trend which has seen growing numbers of tenants looking to leave London in the wake of the growth in home working.

5.4              Despite an overall increase in demand, our research shows that the proportion of landlords intending to buy property has fallen from the four year high of 19% recorded in the first quarter of the year, to 14%. In comparison, the proportion looking to divest has returned to 20%, up three percentage points from the first quarter of the year.

5.5              This picture of demand outstripping supply in the private rented sector is borne out by, amongst others:

• The Royal Institution of Chartered Surveyors which, in its most recent Residential Market Survey for July 2021, observed that in the lettings market the demand for rental properties increased for a fifth straight quarter whilst new landlord instructions remained in decline. It warns of rents rising as a result of the “supply and demand mismatch.”[11]

• Propertymark reports that its members recorded the highest ever recorded average number of prospective tenants in July 2021.[12]

• Rightmove has observed that tenant demand has reached record levels with properties being let out quicker than ever.[13]

5.6              In addition to the pressing need to address the shortfall between the demand for and the supply of private rented housing, we concur with the Government’s observation that the private rented sector has an important role to play in supporting labour market mobility, “allowing households to move easily both within and between regions, leading to a more efficient allocation of labour and skills.”[14]

6.0              Government Policy is Restricting Supply

6.1              Despite the clear need to boost the supply of private rented housing, recent policy decisions have had the effect of supressing the supply of such housing.

6.2              In 2015 the then Chancellor, George Osborne, took the decision to restrict Mortgage Interest Relief to the basic rate of income tax. He told the House of Commons at the time that: “Buy-to-let landlords have a huge advantage in the market as they can offset their mortgage interest payments against their income, whereas homebuyers cannot.”[15] In the same year a 3% stamp duty levy was announced for the purchase of homes to rent out, because, Osborne said: “people buying a home to let should not be squeezing out families who can’t afford a home to buy.”[16]

6.3               Such decisions were based on highly questionable reasoning. Of note:

• That landlords are ‘crowding out’ aspiring homeowners from the market.  A report by the London School of Economics noted: “The (very limited) research into direct competition between investors and private owner-occupiers has found that nationwide only a minority of sales to landlords involved bids from both types of buyer.”[17]

• That landlords are taxed more favourably than homeowners. The 2011 Mirrlees Review into the UK tax system rightly noted: “At present, the tax system treats rented and owner-occupied properties differently, creating a distortion in favour of owner-occupation.” [18]

6.3               The decisions taken on Mortgage Interest Relief were particularly difficult to fathom

given that:

• It means that landlords are being taxed on their turnover rather than their profit, unlike all other businesses.

• The changes did not apply to the provision of holiday lets making the provision of such housing more attractive than the provision of longer term homes to rent which we so desperately need.

6.4              Given this, we agree with the assessment of Professor David Miles, a former member of the Bank of England’s Monetary Policy Committee, who has previously warned that such tax changes actually make it harder for tenants to become homeowners.  As he has noted: “aspiring first-time buyers are hardly helped by squeezing the supply of rental property and driving rents up.”[19]

6.5              Some argue that a smaller private rental market is a good thing making more homes available for purchase.  The reality is that previously rented homes gradually being released on to the market are not going to drive prices down sufficiently to make owner occupied housing more affordable. A mass sell-off of rental properties risks exposing the country to a housing crash, as warned by the previous Governor of the Bank of England[20].

6.6              But it is not just tax measures which are holding the market back:

• There is significant uncertainty about what will be expected of landlords in respect of energy efficiency measures and action to decarbonise the rental housing stock. Under the Government’s proposals outlined in a consultation document[21] Ministers propose increasing to up to £10,000 the amount landlords would be required to contribute to bring a property to an energy performance rating of at least a C. This is despite, as our figures show above, the average net amount a landlord receives in rent being less than £4,500 a year. Likewise, the tax system is not properly designed to support energy improvements. For example, whilst replacing a broken boiler is deemed a tax-deductible repair, replacing an energy inefficient boiler for a more efficient model or heating system is not.

• With the COVID pandemic seeing many more renters reliant on Universal Credit, aside from the impact of the £20 a week cut to Universal Credit, the decision to freeze the Local Housing Allowance rate in cash terms, as announced in the 2020 Autumn Statement, means benefit rates will no longer reflect market rents making it difficult for recipients to cover their rents. We agree with the Institute for Fiscal Studies which has warned that the measure has “bizarre outcomes” given that “some high rent areas get less support than some in low rent ones.”[22]
  
• The failure to address COVID related rent arrears despite the financial package put in place by the Government, as outlined recently by the NRLA.[23] This is especially important given the Government has itself warned that many private landlords: “are highly vulnerable to rent arrears.”[24]

6.7              Whilst the Government has often sought to highlight the role that the corporate build-to-rent sector can play in meeting the demand for private rented property it is important that this is not seen as a panacea to the supply problems in the sector given that:

• The overwhelming majority of landlords are, and will continue to be, individuals. Figures from the British Property Federation show that in the second quarter of the year there were 195,598 build-to-rent homes in the UK either complete, under construction or in planning[25]. Given the most recent English Housing Survey report that 4.4 million households live in the private rented sector, even if all of the build-to-rent homes were in England alone it would still only amount to less than 5% of all private rented households.

• Individual landlords are more agile and able to respond more swiftly than build-to-rent developers to changing demand from tenants and the changing demographics of those tenants.

• Although there is a market for new build to rent properties, it is unlikely that they will be affordable for many of those looking to use the private rented sector. Also, we question if they will be in the right place as it is likely most will be concentrated in larger towns and cities rather than in smaller towns or rural areas where there is increasing demand. 

7.0              Boosting Supply

7.1              Given the need to boost the supply of homes for private rent we propose the following:

• Reversing the changes made to mortgage interest relief in the 2015 Summer Budget.

• The 3% stamp duty levy should not be applied in cases where landlords add to the net supply of housing. This should include where landlords are developing new properties, bringing empty properties back into use, changing use from commercial to residential or converting large properties into smaller, more affordable units of accommodation. It is completely illogical at a time of housing shortage to have a tax on new homes.

• Providing greater certainty for landlords about what will be expected of them in respect of the energy efficiency of rental properties and how to decarbonise them. This should include a financial package to support such improvements such as ensuring energy efficiency measures carried out by a landlord are allowed to be offset against tax as repair and maintenance, rather than as an improvement at sale against Capital Gains Tax.

• The Local Housing Allowance should, at the very least, be returned to the 30th percentile to better reflect actual market rents.

• A financial package should be developed to help private renters to pay off COVID related areas similar to those schemes developed in Scotland and Wales.

September 2021

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