Is a rent cap the answer to the UK's renting troubles?

Labour leader Ed Miliband has announced plans to reform the private rented sector if Labour come to power. But would his policies help or hinder the rental market?

The rental sector is certainly a hot topic. There’s growing discontent among tenants who claim they are forced to live in poor quality homes with little security. They say rents and house prices are so high that saving a deposit to buy a home is impossible.  

To win renters’ votes, Ed Miliband has pledged to overhaul the rental sector if Labour wins the next General Election. The plans could affect tens of thousands of buy-to-let investors and landlords.

So what does he have in mind and would it work?

The Miliband plan

The Labour Party’s plans have three main elements:

Firstly, new three-year tenancy agreements would be introduced. These would start with a six-month probationary period allowing a landlord to evict a tenant if they breach the tenancy contract.

During the next two-and-a-half years tenants would be able, as they are now, to terminate contracts with one month's notice.

Landlords, however, would only be able to terminate contracts with two months’ notice, and only under certain circumstances. These include if a tenant is in rent arrears or guilty of anti-social behaviour, or if the landlord wanted to sell the property or needed it for his or her family. The idea is to prevent landlords from evicting tenants in order to get a higher rent from new tenants.

Secondly, Labour would introduce a new formula to prevent excessive rental increases. It’s examining options for a new benchmark which could be linked to average rent rises, inflation or a combination of the two.

The final part of Miliband’s plan is to ban letting agents from charging tenants fees to sign a tenancy agreement. Landlords would bear all letting agent costs instead. Letting agent fees to tenants are already banned in Scotland.

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Reaction to the plans

In reaction to the announcement Tory chairman and former housing minister Grant Shapps accused Miliband of planning to introduce "Venezuelan-style rent controls".

Venezuela in South America has bought in rent controls. But it’s not a plan that’s worked very well – the controls are largely seen as having led to the spread of slum dwellings and are blamed for deterring landlords from renting out or decorating their properties.

However, similar rent control policies in Germany and Ireland have proved more successful. In the UK, rent controls were introduced as a temporary measure during the First World War and were only finally abolished by Margaret Thatcher in the 1980s.

Elsewhere the Residential Landlords Association (RLA) simply says Labour has got things wrong.

The RLA pointed out that the most recent English Housing Survey showed that the average length of tenancies under the current tenancy model is 3.8 years with just 9% of agreements ended by the landlord.

It also says that figures from the Office for National Statistics (ONS) show that rents in the private rented sector have been increasing by much less than inflation; over the past year they increased by just 1% in England.

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Would the proposals work?

As a former landlord, I really doubt that Labour’s proposals would work for a number of reasons.

Firstly, landlords with mortgages have to abide by the rules of their mortgage agreement and most buy-to-let lenders state that an AST can’t be more than 12 months long. This is because lenders want to be sure they can evict tenants quickly in the event the property is repossessed.

Unless mortgage lenders are forced to come on board with the plans, most landlords simply won’t be in a position to offer three-year tenancies.

Secondly, landlords quite rightly complain about the eviction process. If a tenant fails to pay the rent or breaches the tenancy contract in another way it can take the landlord six months or more and thousands of pounds to evict them. So there would be a pretty justified backlash from landlords if longer tenancy agreements looked likely to make this even harder.

Meanwhile critics claim that rent controls deter landlords from maintaining and decorating properties – and they’re right. Not all landlords are rich and if the rent does little more than cover the mortgage, repairs and improvements to property are not likely to be carried out.

Finally, there appears to be no provision for dealing with a sudden increase in interest rates. A rate hike could leave many landlords unable to raise rents to cover their costs.

One thing’s for sure though: something has to be done about the rental market. But what?

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More on property:

Why Eric Pickles’ tenants charter will never work

Mortgage Market Review: why finding a mortgage is set to get harder

Help to Buy mortgages explained