Continental gift

Compared to mainland European tenancy rules, UK rental law is extremely liberal. Opponents of regulation often recall the revival of the private rented sector since the controls on rent and on the prohibition on short-term lettings were lifted during the Thatcher years.

However, examples on the continent show that regulation and private renting can go hand in hand. In the former West Germany, 40 per cent of households rent their homes privately. This is a lot compared to the 12 per cent of British households renting from a private landlord. But German private tenants have security of tenure which most UK tenants lack, and a system of ‘reference rents’ limits rent increases. Despite the regulation, German landlords make good returns and continue investing in the rental market, although the credit crisis has affected the market severely.

‘The secret of the German system is the reference rent,’ says Barbara Steenberger. She is a former official of the German Union of Tenants (Deutsche Mieterbund) and now heads the European office of the International Union of Tenants in Brussels. ‘The height is fixed in negotiation between tenant and landlord organisations. The reference rent reflects the market price.’

Looking at Germany, one could say regulation is no barrier for a flourishing private rented sector. However, Barbara Steenberger doesn’t mention the generous tax relief. In the first four years, German landlords can write off 28 per cent of the capital value of a newly built home – an important incentive to invest in private rented housing.

German residents often wait to purchase their first home until the day they pay the highest income tax tariff. Germans have the right to write off their mortgage interest, but can use this right only once in their lives.

Private landlords can apply for subsidies under the social housing scheme. This grant is strictly coupled to a social dwelling and fills the gap between the adapted rental price and the market value. About 10 per cent of the housing stock in the former West Germany is social rented this way, though there is no real social sector. All landlords are private in principle and don’t get subsidised as individuals or corporations. When a fixed period of subsidising is over (mostly 20 to 25 years), a social dwelling becomes a private rented home.

Different from Germany and more comparable with the UK division between a social and a private rented sector is the Dutch rental market. However, private landlords in the UK enjoy great freedom whereas in Holland they are bound to exactly the same tenancy rules as social landlords.

And these are very strict rules. That is why the Dutch rental market is sometimes described as ‘a tenant’s paradise’. Landlords don’t always appreciate this. It might be one of the reasons why they sell more than they are purchasing homes. The private rented sector in Holland declined from 14 per cent of the nation’s housing stock in 1998, to 10 per cent in 2018.

Government interference in the Netherlands begins with the start of a contract. A Dutch landlord is not allowed to set a price. Instead, social and private landlords are bound to a ‘quality system’, where a number of ‘quality points’ corresponds to a fixed maximum allowable rent. ‘Quality’ is measured in objective terms such as size (square metres), sanitary and heating facilities, dwelling type, the existence of a balcony, etc. Only above a certain ‘liberalisatio limit’, prices can be freely negotiated.

The quality system does not rate neighbourhoods – so well-off areas are rated the same as deprived ones and property prices aren’t taken into account. As a result, in the expensive western part of Holland maximum allowable rents are often below a rate that would cover investment costs.

Rents are low compared to Britain, and last year’s rent increases were not allowed to exceed inflation. In England private tenants are reluctant to take action against landlords for fear of eviction and have very little access to complaint systems. Dutch tenants, however, can go to a so-called rental commission for free advice. A rental commission can even force the landlord to reduce the rent, when it exceeds the maximum price according to the ‘point system’. The fact that a tenant in the first instance agreed on the price in the lease, doesn’t count. There is little risk of being evicted, as Dutch tenants enjoy strong security of tenure.

A rental commission consists of tenants’ and landlords’ representatives and an independent member and falls under the ministry of housing. The protected status of tenants now and then drives landlords in despair. And tenants can be victims of landlords’ abuse – the system sometimes does break down.

It’s difficult to say whether and how changing regulation influences supply.

Magnus Hammar, secretary general of the International Union of Tenants based in Stockholm, doesn’t believe deregulation helps the housing market. ‘Five years ago in Norway, private developers said ‘let us be free!’ New homebuilding had stagnated and the government was willing to fulfil the developers’ wishes. After five years there is no more housing for ordinary people. The only result of deregulation I see is gentrification,’ Hammar says.

Holland’s building industry has stagnated for most of the past ten years. Production is still a long way behind targets, and people move up the housing ladder very slowly. Advisory boards, policymakers and politicians mention rent control as one of the many causes, which also include unlimited mortgage interest relief that has created a deep chasm between the homebuyer market and rental market.

‘In few countries does supply react so little to changing demand as in Holland,’ says professor Vincent Smit. He is a member of the main advisory board of the Dutch Ministry of Housing. ‘After their studies, many young people desire a studio that is available right away,’ Smit says. ‘Unfortunately, these young people have little to choose from and end up on a waiting list for a social dwelling or buying a home.’

Private investors hardly invest in small-sized homes. One of the reasons is the control system, which dictates – under a certain quality level (ie size) – maximum prices.

The German rental market is unique in a way that there is no division between two different sectors. The system works well and has done for more than 40 years, giving the private rented sector a stability that is lacking in the UK. Frequent changes to tenancy law in the UK have disadvantaged tenants. After deregulation in 1988, many private landlords managed to renew contracts for sitting tenants who had statutory protection against high rent increases according to the old law. Abuses continue and have given the sector in Britain such a bad name that big pension funds and insurance companies don’t want to be associated with the private housing sector.

In Holland, despite strict regulation, pension funds and insurance companies play an important role, but the rental market is dominated by small investors and big social landlords. However, institutional investors say competing social landlords and regulation will force them out. For years, institutions have been selling more residential properties than they have bought. Their share of the housing market has declined from 5 per cent in 1995 to less than 2.5 per cent. Reinvestment is happening only in the ‘liberalised’ segment, which consists of larger apartments.

Liberalised prices are relatively high, though tenants enjoy security of tenure.

But in cities such as Manchester and Leeds, where individuals invested in newly built studio apartments, the development was mostly driven by speculation, rather than demand. But without the existence of short-term tenancies, mortgage lenders would probably not have been so willing to provide almost 100,000 buy to let mortgages in 2017 alone.

Shortholds are a good option for the furnished sector in city centres. This sector mostly accommodates young, well-educated and flexible city workers.

However, vulnerable people can become victims if they are forced to take on this type of insecure tenancy. To become a serious alternative to the homebuyer market, the private rented sector in England could offer more security to tenants.

Dutch and German experiences show that security does not harm long-term investment. On the contrary: more tenant security will give the sector a better image and could provoke new investment by pension funds and insurance companies.

The UK housing market should not be subject to the same type of state control on prices as in Holland. Policymakers should look instead at the German model of price forming, based on negotiation between tenants and landlords organisations. It might also be an idea to encourage private landlords to supply social rented housing by giving them funds.

A regulatory regime covering the private rented sector as well as social landlords should be avoided if vulnerable tenants are to be protected. In Holland. for example, 100,000 homes stand empty because mortgage lenders won’t allow them to be rented. The banks fear they cannot get rid of tenants when prices recover, due to their protected status.